VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION

23. Section 12 imposes, upon a person approached to be an arbitrator, the obligation to disclose to the parties in writing any circumstance that may give rise to justifiable doubts as to his independence and impartiality. An arbitrator can be challenged if there are circumstances that give rise to justifiable doubts about his independence and impartiality or if he does not possess the qualifications agreed to by the parties, but such challenge can be made only for reasons which the party challenging becomes aware of after the appointment has been made. Section 13 speaks of the challenge procedure. It states that the parties are free to agree on such a procedure. Failing that, the party who makes the challenge must within fifteen days after becoming aware of the constitution of the Arbitral Tribunal or of any of the circumstances mentioned in Section 12, send a written statement of the reasons for the challenge to the Arbitral Tribunal. Unless the challenged arbitrator withdraws or the other party to the arbitration agrees to the challenge, the Arbitral Tribunal shall decide upon the challenge and if the challenge is not successful it shall continue the arbitration proceedings and make an award. That award can be sought to be set aside under Section 34.

24. Section 16 empowers the Arbitral Tribunal to rule on its own jurisdiction. Sub-section (1) of Section 16 is relevant, and reads thus: H

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“16. (1) The Arbitral Tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose, - (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (b) a decision by the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

25. Section 34 of the Act is as under: C

proof

under

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A (iii)

(v) the

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A that

that

Provided that an award shall not be set aside merely on the Provided that an award ground of an erroneous shall not be set aside application of the law or merely on the ground of by reappreciation of an erroneous application evidence. of the law orby reappreciation of An application for setting evidence. aside may not be made after three months (3) An application for setting aside may not be the party made after three months making that application have elapsed from the arbitral date on which award or, the party making that application had received the arbitral award or, if a request had been made by under section 33, from the arbitral tribunal: the date on which that request had been E Provided that if the Court disposed of by the is arbitral tribunal: prevented Provided that if the by sufficient cause from Court is satisfied that the making the application applicant was within the said period of prevented by three months it may sufficient cause from F entertain the application making the application within a further period of within the said period of thirty days, but not three months it may thereafter. entertain the application within a further period of (4) On receipt of an thirty days, but not application under thereafter. sub-section (1), the G (4) On receipt of an appropriate application under sub-section (1), the Court may, where it is time appropriate and it is so requested by a party, H

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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 H

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A 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.

26. It is important to observe Section 45 of the Act, which provides a judicial authority with the power to refer parties to arbitration when Part II of the Act applies, in the following manner: D

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27. 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. Some scholars have suggested that the judicial mechanism that comports with the rule of law may be fundamentally at odds with non- judicial/arbitral mechanism which is therefore less formal. But our understanding is that that the rule of law is less in tension with arbitration than critics imagine, because they both aim to serve the same goal-the pursuit of justice.

28. 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 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.

29. With this understanding, we need to have regards to certain precedents of this Court, in order to understand the dispute. The case, which started the debate was the case of Konkan Railway Corpn. Ltd. v. Mehul Construction Co., (2000) 7 SCC 201, wherein a Bench of three Judges of this Court, emphasized the utility of ‘Chief Justice’ as occurring under the earlier Section 11, to come to a conclusion that the power of appointment of an arbitrator was an administrative action. The proposition laid down in the aforesaid case, was confirmed by a Constitution Bench of this Court in Konkan Railway Corporation Ltd. v. Rani Construction (P.) Ltd., (2002) 2 SCC 388. It may be relevant to quote the following observation by this Court: F “21. It might also be that in a given case the Chief Justice or his designate may have nominated an arbitrator although the period of thirty days had not expired. If so, the Arbitral Tribunal would have been improperly constituted and be without jurisdiction. It would then be open to the aggrieved party to require the Arbitral Tribunal to rule on its jurisdiction. Section 16 provides for this. It G states that the Arbitral Tribunal may rule on its own jurisdiction. That the Arbitral Tribunal may rule “on any objections with respect to the existence or validity of the arbitration agreement” shows that the Arbitral Tribunal’s authority under Section 16 is not confined to the width of its H

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A jurisdiction, as was submitted by learned counsel for the appellants, but goes to the very root of its jurisdiction. There would, therefore, be no impediment in contending before the Arbitral Tribunal that it had been wrongly constituted by reason of the fact that the Chief Justice or his designate had nominated an arbitrator although the period of thirty days had not expired B and that, therefore, it had no jurisdiction.” (emphasis supplied)

30. Again, the aforesaid decision came to be referred to a seven- Judge Bench in SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC C 618, wherein majority was penned by Justice P.K. Balasubramanyan and the minority dissent was by Justice C. K. Thakker.

31. The majority opinion, concluded that the power of reference under Section 11 is a judicial function for the following reasons: First, the sub-section (7) of Section 11 makes the adjudication D by the Chief Justice, final. Such final determination in usual course would be a judicial determination. Second, the reason for delegating the power to the highest judicial authority in the State or the Country, is to provide credibility for the process. E Third, the power of a persona designata cannot be delegated, unless such power is judicial power. Fourth, Section 8 and 11 are complimentary and the ambit of power is the same. F Fifth, the principle of Kompetenz-Kompetenz, as enshrined under Section 16, will come to play only if the parties approach the Arbitral Tribunal, without taking recourse to Section 8 or 11. Sixth, it is incongruous to permit the order of the Chief Justice under Section 11(6) of the Act being subjected to scrutiny under G Article 226 of the Constitution. Seventh, the Court on earlier instances did not concentrate on the threshold satisfaction of the Chief Justice, before the same is referred to an arbitration. Eighth, it would be a wasteful exercise for parties to arbitrate on H

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the jurisdiction, only to find that tribunal did not have sufficient A jurisdiction to entertain the arbitration.

32. The minority view posits that the function of the Chief Justice was administrative rather than judicial, for the following reasons: First, merely because a decision adversely affects a party, cannot be the sole reason to conclude that the function is judicial. B

Second, finality of decision taken by the Chief Justice under Section 11(7) refers to only matters such as qualification, independence and impartiality of the arbitrator. The aforesaid does not necessarily make the determination judicial or quasi-judicial. C Third, Section 16 spells out a rule of chronological priority. Fourth, Section 16 has a negative effect, that is, it allows the arbitrators to decide their jurisdiction prior to the Courts stepping in post rendering of the award. Fifth, there is a duty cast upon the Chief Justice under Section D 11(6) ‘to act fairly’. In our consideration, the aforesaid case was heavily caught in the obfuscated concept of judicial or administrative duty, and there is scarce observation on the appropriate standards of judicial enquiry or what aspects does the Court need to consider, while referring a matter to arbitration.

33. In Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd., (2005) 7 SCC 234, this Court decided the ambit of Section 45 of the Act, which relates to the provision for referring parties to arbitration under the New York Convention. While deciding the scope of Section 45 of the Act, Justice Y. K. Sabharwal, as he then was, held in his opinion that a judicial forum seized of the mater should fully rule on the validity and existence of the agreement, before referring the same to the arbitration. The prima facie standard, which the Court found to be gaining popularity across the globe, could not be applied as the statutory language of Section 45, as it existed, did not support such a standard. It may be necessary to observe certain passage from Justice Sabharwal’s opinion: “55. I may also deal with the contention urged on behalf of the appellant that only a prima facie finding is required to be given on a combined reading of Sections 45, 48 and 50 from which it can H

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that the agreement is ‘null and void, inoperative or incapable of being performed’. He further held that ex visceribus interpretation of the Section 45 clearly points to a prima facie view. Justice Dharmadhikari, for different reasons, agreed with the reasoning of Justice B. N. Srikrishna, in the following manner: “111. With utmost respect to both of them, I am inclined to agree with the view expressed by learned Brother Srikrishna, J. but only with a rider and a partly different reason which may I state below: The main issue is regarding the scope of power of any judicial authority including a regular civil court under Section 45 of the C Act in making or refusing a reference of dispute arising from an international arbitration agreement governed by the provisions contained in Part III Chapter I of the Act of 1996. I respectfully agree with learned Brother Srikrishna, J. only to the extent that if on a prima facie examination of the documents and material on record including the arbitration agreement on which request for D reference is made by one of the parties, the judicial authority or the court decides to make a reference, it may merely mention the submissions and contentions of the parties and summarily decide the objection if any raised on the alleged nullity, voidness, inoperativeness or incapability of the arbitration agreement. In E case, however, on a prima facie view of the matter, which is required to be objectively taken on the basis of material and evidence produced by the parties on the record of the case, the judicial authority including a regular civil court, is inclined to reject the request for reference on the ground that the agreement is “null and void” or “inoperative” or “incapable of being performed” F within the meaning of Section 45 of the Act, the judicial authority or the court must afford full opportunities to the parties to lead whatever documentary or oral evidence they want to lead and then decide the question like trial of a preliminary issue on jurisdiction or limitation in a regular civil suit and pass an elaborate G reasoned order. Where a judicial authority or the court refuses to make a reference on the grounds available under Section 45 of the Act, it is necessary for the judicial authority or the court which is seized of the matter to pass a reasoned order as the same is subject to appeal to the appellate court under Section 50(1)(a) of H

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A the Act and further appeal to this Court under sub-section (2) of the said section.”

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was pointed out in the above para that it would be appropriate sometimes to leave the question regarding the live claim to be decided by the Arbitral Tribunal. All that he has to do is to record his satisfaction that the parties have not closed their rights and the matter has not been barred by limitation. Thus, where the Chief Justice comes to a finding that there exists a live issue, then naturally this finding would include a finding that the respective claims of the parties have not become barred by limitation.”

22. Where the intervention of the court is sought for appointment of an Arbitral Tribunal under Section 11, the duty of the Chief Justice or his designate is defined in SBP & Co. [(2005) 8 SCC H

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A 618] This Court identified and segregated the preliminary issues that may arise for consideration in an application under Section 11 of the Act into three categories, that is, (i) issues which the Chief Justice or his designate is bound to decide; (ii) issues which he can also decide, that is, issues which he may choose to decide; and (iii) issues which should be left to the Arbitral Tribunal to decide. 22.1 The issues (first category) which the Chief Justice/his designate will have to decide are: (a) Whether the party making the application has approached the appropriate High Court. (b) 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. 22.2 The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are: (a) Whether the claim is a dead (long-barred) claim or a live claim. (b) 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. 22.3 The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are: (i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration). (ii) Merits or any claim involved in the arbitration.

23. It is clear from the scheme of the Act as explained by this Court in SBP & Co. [(2005) 8 SCC 618] , that in regard to issues falling under the second category, if raised in any application under Section 11 of the Act, the Chief Justice/his designate may decide them, if necessary, by taking evidence. Alternatively, he may leave those issues open with a direction to the Arbitral Tribunal to decide the same. If the Chief Justice or his designate chooses to examine the issue and decides it, the Arbitral Tribunal

VIDYA DROLIA AND OTHERS v. 1161 DURGA TRADING CORPORATION [N. V. RAMANA, J.]

cannot re-examine the same issue. The Chief Justice/his designate will, in choosing whether he will decide such issue or leave it to the Arbitral Tribunal, be guided by the object of the Act (that is expediting the arbitration process with minimum judicial intervention). Where allegations of forgery/fabrication are made in regard to the document recording discharge of contract by full and final settlement, it would be appropriate if the Chief Justice/ his designate decides the issue.” (emphasis supplied)

36. In Chloro Controls India Private Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641, this Court had to expound the scope of Section 45 in a multi-party arbitration. The Court held as under: “84. The issue of whether the courts are empowered to review the existence and validity of the arbitration agreement prior to reference is more controversial. A majority of the countries admit to the positive effect of kompetenzkompetenz principle, which requires that the Arbitral Tribunal must exercise jurisdiction over the dispute under the arbitration agreement. Thus, challenge to the existence or validity of the arbitration agreement will not prevent the Arbitral Tribunal from proceeding with hearing and ruling upon its jurisdiction. If it retains jurisdiction, making of an award on the substance of the dispute would be permissible without waiting for the outcome of any court action aimed at deciding the issue of the jurisdiction. The negative effect of the kompetenzkompetenz principle is that arbitrators are entitled to be the first to determine their jurisdiction which is later reviewable by the court, when there is action to enforce or set aside the arbitral award. Where the dispute is not before an Arbitral Tribunal, the court must also decline jurisdiction unless the arbitration agreement is patently void, inoperative or incapable of being performed.” (emphasis supplied)

37. In Arasmeta Captive Power Company Private Limited G v. Lafarge India Pvt. Ltd., (2013) 15 SCC 414, this Court had to answer the issue concerning the conflict between Chloro Controls Case (supra) and SBP Case (supra), which the Court formulated in the following manner: H

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A “2. We have commenced our opinion with the aforesaid exposition of law as arguments have been canvassed by Mr Ranjit Kumar, learned Senior Counsel for the appellants, with innovative intellectual animation how a three-Judge Bench in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 has inappositely and incorrectly understood the principles stated in the major part of the decision rendered by a larger Bench in SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618 and, in resistance, Mr Harish Salve and Dr A.M. Singhvi, learned Senior Counsel for the respondent, while defending the view expressed later by the three-Judge Bench, have laid immense emphasis on consistency and certainty of law that garner public confidence, especially in the field of arbitration, regard being had to the globalisation of economy and stability of the jurisprudential concepts and pragmatic process of arbitration that sparkles the soul of commercial progress. We make it clear that we are not writing the grammar of arbitration but indubitably we intend, and we shall, in course of our delineation, endeavour to clear the maze, so that certainty remains “A Definite” and finality is “Final”.” The Court answering the question, answered thus: “40. From the aforesaid authorities itis luculent that the larger E Bench in SBP [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618], after deliberating at length with regard to the role of the Chief Justice or his designate, while dealing with an application under Section 11(6) of the Act, has thought it appropriate to define what it precisely meant in para 39 of the judgment. The majority, if we allow ourselves to say so, was absolutely conscious that it required to be so statedand hence, it did so. The deliberation was required to be made as the decision in Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd. [(2002) 2 SCC 388] where the Constitution Bench had held that an order passed by the Chief Justice under Section 11(6) is an administrative order and not a judicial one and, in that context, the Bench in many a paragraph proceeded to state about the role of the Chief Justice or his designate. The phrases which have been emphasised by Mr Ranjit Kumar, it can be irrefragably stated, they cannot be brought to the eminence of ratio decidendi of the judgment. The stress laid thereon may be innovative but when the learned Judges H

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themselves have culled out the ratio decidendi in para 39, it is extremely difficult to state that the principle stated in SBP [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] requires the Chief Justice or his designate to decide the controversy when raised pertaining to arbitrability of the disputes. Or to express an opinion on excepted matters. Such an inference by syllogistic process is likely to usher in catastrophe in jurisprudence developed in this field. We are disposed to think so as it is not apposite to pick up a line from here and there from the judgment or to choose one observation from here or there for raising it to the status of “the ratio decidendi”. That is most likely to pave one on the path of danger and it is to be scrupulously avoided. The propositions set out in SBP [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] , in our opinion, have been correctly understood by the two-Judge Bench in Boghara Polyfab (P) Ltd. [National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267] and the same have been appositely approved by the three- Judge Bench D in Chloro Controls India (P) Ltd. [Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641] and we respectfully concur with the same. We find no substance in the submission that the said decisions require reconsideration, for certain observations made in SBP [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618], were not noticed. We may hasten to add E that the three-Judge Bench has been satisfied that the ratio decidendi of the judgment in SBP [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] is really inhered in para 39 of the judgment.”

38. This Court in Duro Felguera, S.A. v. Gangavaram Port, F (2017) 9 SCC 729, held as under: (Justice Banumathi) “20…Since the dispute between the parties arose in 2016, the amended provision of sub-section (6-A) of Section 11 shall govern the issue, as per which the power of the Court is confined only to examine G the existence of the arbitration agreement.” Justice Kurian Joseph) “59. The scope of the power under Section 11(6) of the 1996 Act was considerably wide in view of the decisions in SBP and Co. H

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A [SBP and Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] and Boghara Polyfab [National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267]. This position continued till the amendment brought about in 2015. After the amendment, all that the courts need to see is whether an arbitration agreement exists—nothing more, nothing less. B The legislative policy and purpose is essentially to minimize the Court’s intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11(6- A) ought to be respected.” (emphasis supplied) C

39. However, in Oriental Insurance Company Ltd. v. Narbheram Power and Steel Private Limited, (“Oriental Insurance”) (2018) 6 SCC 534, a three-Judge Bench of this Court, following the decision in Vulcan Insurance v. Maharaj Singh, (1976) 1 SCC 943, dismissed an application under Section 11 of the Act after examining the D arbitrability of the dispute. It may be noted that the Court did not answer the question as to the power of the Court under Section 11 of the Act in this case.

40. Similarly, in United India Insurance Company Limited v. Hyundai Engineering and Construction Company Limited, E (“Hyundai Engineering”) (2018) 17 SCC 607, the Court examined the arbitrability of the dispute as well as whether the dispute fell within the ambit of an excepted matter by placing heavy reliance on the decision in Oriental Insurance (supra). These two cases are, by necessary, implication to be restricted to the facts and circumstances of the case.

41. Further, in United India Insurance Company Limited v. Antique Art Exports Private Limited (“Antique Arts”), (2019) 5 SCC 362, this Court, in a proceeding under Section 11 of the Act, distinguished the holding in Duro Felguera (supra) on the grounds that the same was a mere general observation about the effect of the amended provisions and that the said decision was distinguishable on the facts of the case. The Court held that the power under Section 11 with the Chief Justice/ his designates is a judicial power and not an administrative function, therefore leaving some degree of judicial intervention. The Court went on to hold that when it comes to examining the prima facie H

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existence of an arbitration agreement, it is always necessary to ensure that the dispute resolution process does not become unnecessarily protracted. On this basis, the Court, in a proceeding under Section 11 of the Act, analyzed the effect of the execution of a discharge voucher and the settlement of the claim by accord and satisfaction. On finding the claim to have been settled by accord and satisfaction, the Court held that there was no dispute under the agreement to be referred to an arbitrator for adjudication.

42. In Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714, a Bench of three Judges, while overruling the Antique Arts Case (supra), held as under: C “10. This being the position, it is clear that the law prior to the 2015 Amendment that has been laid down by this Court, which would have included going into whether accord and satisfaction has taken place, has now been legislatively overruled. This being the position, it is difficult to agree with the reasoning contained in the aforesaid judgment [United India Insurance Co. Ltd. v. D Antique Art Exports (P) Ltd., (2019) 5 SCC 362] , as Section 11(6-A) is confined to the examination of the existence of an arbitration agreement and is to be understood in the narrow sense as has been laid down in the judgment in Duro Felguera, SA [Duro Felguera, SA v. Gangavaram Port Ltd., (2017) 9 SCC E 729] — see paras 48 & 59 [Ed.: The said paras 48 & 59 of Duro Felguera, SA v. Gangavaram Port Ltd., (2017) 9 SCC 729, for ready reference, read as follows:”48. Section 11(6-A) added by the 2015 Amendment, reads as follows:”11. (6- A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub- section F (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.”(emphasis supplied) From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one G aspect— the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple—it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between H

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A the parties to the agreement.***59. The scope of the power under Section 11(6) of the 1996 Act was considerably wide in view of the decisions in SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618 and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267. This position continued till the amendment brought about in 2015. After the amendment, all that the courts B need to see is whether an arbitration agreement exists— nothing more, nothing less. The legislative policy and purpose is essentially to minimise the Court’s intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11(6-A) ought to be respected.”].

C 11. We, therefore, overrule the judgment in Antique Art Exports (P) Ltd. [United India Insurance Co. Ltd. v. Antique Art Exports (P) Ltd., (2019) 5 SCC 362] as not having laid down the correct law but dismiss this appeal for the reason given in para 3 above.”

D 43. From the study of the precedents, the following propositions, concerning Section 11 of the Act, are clear and binding:

1. Reference power under Section 11 of the Act is judicial and not administrative.

E 2. 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.

3. Amendment in 2015 was brought into force to limit the power of judicial interference under Section 11 of the Act.

F 44. Having observed the precedents holding the field in respect of Section 11, we now come to an analysis of Section 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 G 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.

45. The primary reason for the same, is the negative effect of Kompetenz Kompetenz under Section 16, which mandates that the H

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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.

46. In this context, we need to examine the meaning of ‘validity of arbitration agreement’ as occurring under Section 8 of the Act. There is no doubt that ‘validity’ to be examined under Section 8(2) of the 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. However, the burden of the precedents stops us from accepting such a narrow interpretation.

47. This brings us to the issue whether the issue of ‘arbitrability’ can be analyzed by the Courts under Section 8 or 11 of the Act?

48. There is no doubt that ‘arbitrability’ has acquired various meaning around the world. In this context, this Court is required to first identify the various meaning for the aforesaid term, in order to recognize its meaning in the Indian context. 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 E of America, arbitrability also refers to the complicated balance between courts and arbitrators regarding who should be the initial decision-maker on issues such as the validity of the arbitration agreement. Out of the two meanings, we subscribe 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. Having ascertained the meaning of arbitrability, we need to analyze whether arbitrability could be determined by the Court at the reference stage.

49. No doubt, arbitrability finds a close nexus with the validity of the arbitration agreement, yet we need to observe the unique nature of the arbitration agreement, which is a bundle of contractual and jurisdictional elements. 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. H

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A 50. Section 34 (2)(b) provides the statutory basis for objecting 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 cannot not be dealt effectively. B 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.

C 51. It is to be noted that whether a subject matter can or 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. This case is one such example of over-broad ratio, expounded by this Court by laying that certain subject areas cannot be arbitrated per se. At this juncture, we may observe the case of The London Steamship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain and The French State, [2015] EWCA Civ 333. The case relates to an oil spill off the coast of Spain and France from a vessel named ‘The Prestige’, which resulted in the Government of Spain and France taking action against the Captain of the ship and other officers under the Spanish Criminal Code, as well as instituting a case against the Owner to pay punitive damages under the Spanish Penal Code. It may be noted that the claim was also brought against the insurer of the ship for indemnity. Those claims were based both on the insurer’s obligation to indemnify the owners against their obligations under the F International Convention on Civil Liability for Oil Pollution Damage and on its obligation to indemnify them against their independent liability for the tortious acts of the master, chief officer and chief engineer. The insurers took pre-emptive action by commencing arbitral proceedings for declaratory relief: a declaration that France and Spain were bound by the arbitration clause provided in the insurers’ rules and that the G insurers were not liable under the underlying contract. The relief sought was granted in favour of the insurers in the form of arbitral awards. The insurers attempted to enforce the arbitral awards in England before the judgment was rendered in the Spanish legal proceedings. France and Spain opposed this enforcement of the arbitral awards on various grounds. H One such reason, which was raised on behalf of Spain, was that the

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matter was incapable of being resolved by arbitration. The Court while dismissing the aforesaid objection, held that: In my view this passage amounts to a finding that a conviction is not an integral element of the cause of action. The distinction is important, because even if a conviction were a pre-condition to the right to recover against the insurer, there would be no reason why an arbitrator should not determine a claim of this kind, taking into account whether the condition has or has not been satisfied. He cannot, on the other hand, formally convict any person of a criminal offence. This Court does recognize the jurisdictional differences and uniqueness between England and India, while placing reliance on the same. However, the important aspect is that 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.

52. To this extent, even this Court in Avitel Post Studioz Limited E v. HSBC PI Holdings (Mauritius) Limited, Civil Appeal No. 5145 of 2016 has held as under: “16. In the light of the aforesaid judgments, paragraph 27(vi) of Afcons [Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd., (2010) 8 SCC 24] and paragraph 36(i) F of Booz Allen [Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011)5 SCC 532, must now be read subject to the rider that the same set of facts may lead to civil andcriminal proceedings and if it is clear that a civil dispute involvesquestions of fraud, misrepresentation, etc. which can be the subject matter of such G proceeding under section 17 of the Contract Act, and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter would not lead to the conclusion that a dispute which is otherwise arbitrable, ceases to be so.” H

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A 53. It is important to note that various countries have already allowed inter-partes arbitration with respect to in rem rights concerning intellectual property etc., through a statutory framework. It is worthwhile to study the feasibility of the same, if we want to provide impetus to arbitration.

B 54. On a different note, we need to keep in mind that 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 C of the Court to decide issues should be limited to those expressly provided by the law.

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33. But where the issue of “arbitrability” arises in the context of an application under Section 8 of the Act in a pending suit, all aspects of arbitrability will have to be decided by the court seized of the suit, and cannot be left to the decision of the arbitrator. Even if there is an arbitration agreement between the parties, and even if the dispute is covered by the arbitration agreement, the court where the civil suit is pending, will refuse an application under Section 8 of the Act, to refer the parties to arbitration, if the subject-matter of the suit is capable of adjudication only by a public forum or the relief claimed can only be granted by a special court or Tribunal. XXXXXX C

36. The well-recognised examples of non- arbitrable disputes are: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding-up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes. The Court came to the aforesaid conclusion, of ascertaining certain subject matters as non-arbitrable, on two main reasons, (1.) that certain matters are excluded for examination by a private forum; (2) that in rem rights cannot be arbitrated. F

56. In A. Ayysamy v. A. Paramsivam, (2016) 10 SCC 386, this Court had to deal with an issue concerning the arbitrability of fraud under the Act, prior to the 2015 amendment. The Court by two separate opinions delivered by Justice A. K. Sikri and Dr. D. Y. Chandrachud, has recognized that the Court at the reference stage, could classify a G matter and accordingly refer a matter to arbitration which does not have serious allegations of fraud.

57. In Emaar MGF Land Limited v. Aftab Singh, (2019) 12 SCC 751, this Court held that Consumer Protection Act cases are not arbitrable. On a perusal of the judgment, no doubt reliance was placed H

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A on the Booz Allen Case (supra) and there is some discussion on the scope of Section 8 of the Arbitration Act. However, the thrust of the reasoning is not on the question of arbitrability, rather it was on the fact that the Consumer Protection Act, had an implied bar for referring a matter to arbitration, being a special legislation. The difference is subtle, yet it is required to be recognized that the Consumer Protection Act, B impliedly barred the application of the Arbitration Act.

58. From a study of the above precedents, the following conclusion, with respect to adjudication of subject-matter arbitrability under Section 8 or 11 of the Act, are pertinent: C a) In line with the categories laid down by the earlier judgment of Boghara Polyfab (supra), the Courts were examining ‘subject-matter arbitrability’ at the pre-arbitral stage, prior to the 2015 amendment. b) Post the 2015 amendment, judicial interference at the reference stage has been substantially curtailed. c) Although subject matter arbitrability and public policy objections are provided separately under Section 34 of the Act, the Courts herein have understood the same to be interchangeable under the Act. Further, subject matter arbitrability is inter-linked with in-rem rights. d) There are special classes of rights and privileges, which enure to the benefit of a citizen, by virtue of constitutional or legislative instrument, which may affect the arbitrability of a subject matter.

F 59. It may be noted that 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. In line with the aforesaid proposition, the Courts have interfered with the subject matter arbitrability at the pre-reference stage.

G 60. 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 H

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8 of the Arbitration Act. It is more appropriate to be taken up by the A Court at the stage of enforcement under Section 34 of the Act. Having said so, 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.

61. At this stage a word of caution needs to be said for arbitrators. B They 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 arbitrability. Merely because a matter verges on a prohibited territory, should not by in itself stop the arbitrator from deciding the matter. He/she should be careful in considering the question of non-arbitrability. C

62. This brings us to the question of what prima facie case means, as is required to determine the non-existence of a valid arbitration agreement under Section 8 of the Act. The meaning and scope of ‘prima facie’ has greatly varied in common law as well as the civil law systems. Immediately, at least two meanings can be attributed to this term. First, D 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. Shin-Etsu Case (supra), categorically laid that prima facie E test is to be adopted under Section 45 of the Act (prior to the 2015 amendment). The Court was of the opinion that prima facie determination was seen as the view of Court, which can again be gone into by the Tribunal.

63. In Antique Arts (supra) (subsequently over-ruled on a F different point), this Court while following New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd., (2015) 2 SCC 424 held that that a bald plea of fraud, coercion, duress or undue influence is not enough and the party who sets up a plea, must establish the same on a prima facie basis by placing material before the Chief Justice/his designate. This categorically establishes that prima facie case is relatable G to establishment of initial presumption, rather than an evidentiary standard.

64. The 246th Law Commission Report, in respect of scope and nature of pre-arbitral judicial intervention, states as under: H

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A “28. The Act recognizes situations where the intervention of the Court is envisaged at the pre-arbitral stage i.e. prior to the constitution of the Arbitral Tribunal, which includes Sections 8, 9, 11 in the case of Part I arbitrations and Section 45 in the case of Part II arbitrations. Sections 8, 45 and also Section 11 relating to “reference to arbitration” and “appointment of the Tribunal”, B directly affect the constitution of the Tribunal and functioning of the arbitral proceedings. Therefore, their operation has a direct and significant impact on the “conduct” of arbitrations. Section 9, being solely for the purpose of securing interim relief, although having the potential to affect the rights of parties, does not affect the “conduct” of the arbitration in the same way as these other provisions. It is in this context the Commission has examined and deliberated the working of these provisions and proposed certain amendments.

29. The Supreme Court has had occasion to deliberate upon the scope and nature of permissible pre- arbitral judicial intervention, especially in the context of Section 11 of the Act. Unfortunately, however, the question before the Supreme Court was framed in terms of whether such a power is a “judicial” or an “administrative” power — which obfuscates the real issue underlying such nomenclature/description as to — E — the scope of such powers — i.e. the scope of arguments which a court (Chief Justice) will consider while deciding whether to appoint an arbitrator or not — i.e. whether the arbitration agreement exists, whether it is null and void, whether it is voidable, etc.; and which of these it should leave for decision of the Arbitral F Tribunal. — the nature of such intervention — i.e. would the court (Chief Justice) consider the issues upon a detailed trial and whether the same would be decided finally or be left for determination of the Arbitral Tribunal. G

30. After a series of cases culminating in the decision in SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618 , the Supreme Court held that the power to appoint an arbitrator under Section 11 is a “judicial” power. The underlying issues in this judgment, relating to the scope of intervention, were subsequently clarified by H

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Raveendran, J. in National Insurance Co. Ltd. V. Boghara A Polyfab (P) Ltd., (2009) 1 SCC 267, ….. …..

32. In relation to the nature of intervention, the exposition of the B law is to be found in the decision of the Supreme Court in Shin-Etsu Chemical Co. Ltd. V. Aksh Optifibre Ltd., (2005) 7 SCC 234] , (in the context of Section 45 of the Act), where the Supreme Court has ruled in favour of looking at the issues/controversy only prima facie. C

33. It is in this context, the Commission has recommended amendments to Sections 8 and 11 of the Arbitration and Conciliation Act, 1996. The scope of the judicial intervention is only restricted to situations where the court/ judicial authority finds that the arbitration agreement does not exist or is null and void. Insofar as the nature of intervention is concerned, it is recommended that in the event the court/judicial authority is prima facie satisfied against the argument challenging the arbitration agreement, it shall appoint the arbitrator and/or refer the parties to arbitration, as the case may be. The amendment envisages that the judicial authority shall not refer the parties to arbitration only if it finds that there does not exist an arbitration agreement or that it is null and void. If the judicial authority is of the opinion that prima facie the arbitration agreement exists, then it shall refer the dispute to arbitration, and leave the existence of the arbitration agreement to be finally determined by the Arbitral Tribunal. However, if the judicial authority concludes that the agreement does not exist, then the conclusion will be final and not prima facie. The amendment also envisages that there shall be a conclusive determination as to whether the arbitration agreement is null and void. In the event that the judicial authority refers the dispute to arbitration and/ or appoints an arbitrator, under Sections 8 and 11 respectively, such a decision will be final and non-appealable.

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A An appeal can be maintained under Section 37 only in the event of refusal to refer parties to arbitration, or refusal to appoint an arbitrator.” (emphasis supplied)

65. The difference of statutory language provided under the B 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 (supra) and the Duro Felguera case (supra) recommended for finding C 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. It is to be noted that a finding of non- existence of arbitration agreement is final subject to the appeal process only, without further scope for arbitration tribunal to decide D 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, we can only stress on the requirement of quality legislative drafting protocols to eliminate such complications.

E 66. From the aforesaid discussion, we can conclude that the respondent/defendant has to establish a prima facie case of non-existence of valid arbitration agreement, wherein 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, F 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.

G 67. 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 (supra), has been explicitly accommodated even under domestic H

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arbitration by the 2015 amendment with appropriate modifications. A

68. Before we part with this aspect, it was extensively argued before us that the test for the Court is to see whether a party is able to establish a ‘good arguable case’ for establishing the existence of the arbitration agreement. However, the statutory language under Sections 8 and 11 emphasizes on the threshold requirement for a party for B establishing the opposite. No doubt, the aforesaid approach may have merits. However, 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. C

69. Having established the threshold standard for the Court to examine the extent of validity of the arbitration agreement, as a starting point, it is necessary to go back to Duro Felguera (supra), which laid down: D “48…..From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one aspect—the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple — E it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.” At first blush, the Court seems to have read the existence of the arbitration agreement by limiting the examination to an examination of its factual existence. However, that is not so, as the existence of arbitration agreement does not mean anything unless such agreement is contractually valid. This view is confirmed by the Duro Felguera case (supra), wherein the reference to the contractual aspect of arbitration agreement is ingrained under the Section 7 analysis. A mere agreement is not legally binding, unless it satisfies the core contractual requirements, concerning consent, consideration, legal relationship, etc. In Mayavati Trading Case (supra) and Garware Wall Ropes Ltd. v. Coastal Marine Construction and Engineering Ltd., [2019] 9 SCC 209, the aforesaid stand has been confirmed. Therefore, the scope of the Court to examine the prima facie validity of an arbitration agreement includes H

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A only the determination of the following:

92. Whether the arbitration agreement was in writing? or

93. Whether the arbitration agreement was contained in exchange of letters, telecommunication, etc?

B 94. Whether the core contractual ingredients qua the arbitration agreement were fulfilled?

95. On rare occasions, whether the subject-matter of dispute is arbitrable? At the cost of repetition, we note that Section 8 of the Act C mandates that a matter should not be referred to an arbitration by a court of law unless it finds that prima facie there is no valid arbitration agreement. The negative language used in the Section is required 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, as laid down above. Therefore, the rule for the Court is ‘when in doubt, do refer’.

70. Moreover, the amendment to Section 8 now rectifies the short-comings pointed out in the Chloro Control Case (supra) 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.

71. 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.

G 72. Coming to the scope of judicial interference under Section 11, the 246th Law Commission Report noted that: “31. The Commission is of the view that, in this context, the same test regarding scope and nature of judicial intervention, as applicable in the context of Section 11, should also apply to Sections H

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8 and 45 of the Act — since the scope and nature of judicial A intervention should not change upon whether a party (intending to defeat the arbitration agreement) refuses to appoint an arbitrator in terms of the arbitration agreement, or moves a proceeding before a judicial authority in the face of such an arbitration agreement.”

73. We are cognizant of the fact that the statutory language of B Section 8 and 11 are different, however materially they do not vary and both Sections provide for limited judicial interference at reference stage, as enunciated above.

74. In line with our holding on question no. 1, generally it would not have been appropriate for us to delve into the second question. C However, considering that a question of law has been referred to us, we agree with the conclusions reached by our learned brother.

75. Before we part, the conclusions reached, with respect to question no. 1, are: a. Sections 8 and 11 of the Act have the same ambit with respect D to judicial interference. b. Usually, 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. E c. 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 portraying a strong case that he is entitled to such a finding. F d. The Court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis, as laid down above, i.e., ‘when in doubt, do refer’. e. The scope of the Court to examine the prima facie validity of an arbitration agreement includes only: G

a. Whether the arbitration agreement was in writing? or b. Whether the arbitration agreement was contained in exchange of letters, telecommunication etc? H

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A c. Whether the core contractual ingredients qua the arbitration agreement were fulfilled? d. On rare occasions, whether the subject-matter of dispute is arbitrable?

B Kalpana K. Tripathy Referred questions answered and appeals and SLPs disposed of.