The Arbitration & Conciliation Amendment Act, 2015 (‘2015 Amendment Act’) brought about a significant change in the process of appointment of arbitrators under Section 11 of the Arbitration & Conciliation Act, 1996 (‘1996 Act’).
Out of the others, the relevant changes for the purpose of present issue were as follows:
- The default power of appointment shifted from the Chief Justice of the High Court in arbitrations governed by Part I of the 1996 Act, to the High Court;
- The scope of jurisdiction under Sub-section (6A) of Section 11 was confined to the examination of the existence of the arbitration agreement at the pre-reference stage.
SBP & Co. v. Patel Engineering Ltd
Prior to the coming into force of the 2015 Amendment Act, much controversy had surrounded the nature of the power of appointment by the Chief Justice, or his designate under Section 11.
A seven-judge Constitution Bench of the Supreme Court in SBP & Co. v. Patel Engineering Ltd, defined the scope of power of the Chief Justice under Section 11 and inter alia held that the scope of power exercised Under Section 11 was to first decide:
- whether there was a valid arbitration agreement;
- whether the person who has made the request under Section 11, was a party to the arbitration agreement; and
- whether the party making the motion had approached the appropriate High Court.
The Court emphasized that Chief Justice under Section 11(6) in the exercise of his judicial power, is expected to adjudicate on contentious issues such as existence of valid arbitration agreement. Thus, as apparent, prior 2015 Amendment Act, the filters while deciding Section 11(6) application were two-fold i.e. existence & validity (‘Dual Filter Test’).
The decision in S.B.P & Co. was followed by the Supreme Court in National Insurance Co. Ltd v Boghara Polyfab Pvt Ltd, Union of India (UOI) and Ors. v Master Construction Co., and other decisions.
246th Law Commission Report
The 246th Law Commission Report dealt with some of the judgments which had relied upon the Dual Filter Test as provided in S.B.P. & Co. and observed that at the stage of a Section 11(6) application, only “existence” of an arbitration agreement ought to be looked at and not other preliminary issues.
A reading of the Law Commission Report, together with the Statement of Objects and Reasons, shows that the Law Commission felt that the judgments in SBP & Co. and Boghara Polyfab required a relook, as a result of which, so far as Section 11 is concerned, the Supreme Court or, as the case may be, the High Court, while considering any application Under Section 11(4) to 11(6) is to confine itself to the examination of the existence of an arbitration agreement and leave all other preliminary issues to be decided by the arbitrator.
The 246th Law Commission Report, which led to the enactment of Section 11(6A), stated as follows:-
“Section 11(6A) of the amendment contemplates a two-step process to be adopted by a judicial authority when considering an application seeking the reference of a pending action to arbitration. 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 (i.e. invalid). 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.”
It will be seen that though the Law Commission Report speaks not only of “existence” but also of an arbitration clause being null and void i.e. invalid, this has not translated itself into the language of Section 11(6A) as inserted by 2015 Amendment Act which reads as under:-
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 (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.
Thus, it is apparent that Section 11 was amended by the 2015 Amendment Act, to overcome the effect of all previous judgments rendered on the scope of power by a non obstante clause.
However, is it inadvertent on the part of Law Commission not to put the Dual Filter Test and instead use ‘existence’ as the sole criteria while deciding Section 11(6A) applications? The answer may be hidden in the judicial interpretation of Section 11(6A) post 2015 Amendment Act.
Section 11(6A) v. Section 16 and Kompetenz–Kompetenz
Another important purpose of 2015 Amendment Act was to reinforce the kompetenz–kompetenz principle enshrined in Section 16 of the 1996 Act. By virtue of the non obstante Clause incorporated in Section 11(6A), previous judgments rendered in SBP & Co. and Boghara Polyfab, were legislatively over-ruled. The scope of examination is now confined only to the existence of the arbitration agreement at the Section 11 stage, and nothing more.
This is further substantiated in Duro Felguera S.A. v. Gangavaram Port Limited, wherein the Supreme Court inter alia held that the intention of legislation behind Section 11(6A) is for the Court -to only look into one aspect-the existence of an arbitration agreement. 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 the parties to the agreement. After the 2015 Amendment Act, all that the courts 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.
Following, the dictum of Duro Felguera, the Supreme Court in Mayavti Trading Pvt. Ltd. Vs. Pradyuat Deb Burman reiterated that Section 11(6A) 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 Duro Felguera.
Further, Duro Felguera also makes it clear that the mischief that was sought to be remedied by the introduction of Section 11(6A) was contained in the judgments of SBP & Co. and Boghara Polyfab. In view of the legislative mandate contained in Section 11(6A), the Court is now required only to examine the existence of the arbitration agreement. All other preliminary or threshold issues are left to be decided by the arbitrator under Section 16, which enshrines the Kompetenz–Kompetenz principle.
Section 11(6A) is to be contrasted with Section 16(1) of the Act which reads as follows:
“16. Competence of arbitral tribunal to rule on its jurisdiction.—(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,—…”
The doctrine of “Kompetenz–Kompetenz”, implies that the arbitral tribunal is empowered and has the competence to rule on its own jurisdiction, including determining all jurisdictional issues, and the existence or validity of the arbitration agreement. This doctrine is intended to minimize judicial intervention, so that the arbitral process is not thwarted at the threshold, when a preliminary objection is raised by one of the parties.
Vidya Drolia & Ors. v. Durga Trading Corporation
It will be noticed that “validity” of an arbitration agreement is, therefore, apart from its “existence”. In Vidya Drolia & Ors. v. Durga Trading Corporation , Hon’ble Mr Justice R.F. Nariman, of the Supreme Court of India, referred this issue to a larger Bench considering the importance of the moot question i.e. whether the word “existence” in Section 11(6A) of the 1996 Act would include weeding-out arbitration clauses in agreements which indicate that the subject-matter of the dispute is incapable of arbitration. Thus, the position as reaffirmed by Vidya Drolia is that albeit the Law Commission in its 246th report suggested to incorporate the Dual Filter Test in Section 11(6A), the same has not been transpired into 2015 Amendment Act which is interpreted by Supreme Court in Duro Fulguera and Mayavti Trading to mean that while deciding an application under Section 11(6A), the Court has to confine its scrutiny only and only to check the existence of an arbitration agreement and not existence of a valid arbitration agreement as was the position before 2015 Amendment Act.
Delhi High Court and Dual Filter Test
The position as settled by the Supreme Court in Duro Fulguera and Mayavti Trading appears to be applied differently by Delhi High Court in recent cases which are as follows:-
Devi Fatehpuria vs. Jugal Kishore Shyam Prakash and Co. and Ors. Arb. P. 339/2019 decided on 13.03.2020
17 It is a settled law that while examining a petition under Section 11(6) the Act the Court has to examine only the existence and validity of the Arbitration Agreement.
Unique Reality Pvt. Ltd. vs. RC Infra Developers and Ors. Arb. P. 432/2019 decided on 27.01.2020;
10 This Court under Section 11(6) of the Act in only required to examine the existence and validity of an Arbitration Agreement. This is clearly the mandate of Section 11(6A) of the Act.
Pave Infrastructure Pvt. Ltd. vs. WAPCOS Ltd. Arb. P. 574/2019 decided on 27.01.2020
7 In so far as the question of the disputes being Arbitral disputes or not, is concerned, in a recent judgment in Mayavti Trading Pvt. Ltd. Vs. Pradyuat Deb Burman the Supreme Court has clearly held that the mandate of the High court in examining a petition under Section 11(6) of the Act will be confined to examination of the existence and validity of the Arbitration Agreement.
Interestingly, in Ritika Diwan and Ors. vs. Supertech Limited ARB. P. 585/2019 decided on 13.11.2019, the Delhi High Court has interpreted Section 11(6A) in light of Mayavti Trading to mean that while deciding such application, the Court has to examine the existence of an Arbitration Agreement between the parties. However, judgements post Ritika Diwan follow the Dual Filter Test interpreting Mayavti Trading.
Further, in all of the aforesaid cases post Ritika Diwan, the Delhi High Court has interpreted Mayavti Trading to mean that the mandate of the High court in examining a petition under Section 11(6) of the Act will be confined to examination of the existence and validity of the Arbitration Agreement.
However, it appears that that is not precisely what was observed in that case. The relevant paragraph is reproduced below:
“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 as Section 11(6A) 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 Duro Felguera, S.A. (Supra) – see paras 48 & 59..”
Scrutiny under 11(6A): Is it Confined to Existence only?
There are umpteen number of cases, where the filter of existence is taken as the sole filter under Section 11(6A). Some of these judgements are as follows:-
Jindal Stainless Limited vs. Damco India Private Ltd. Arb. P. 347/2016 decided on 14.12.2016
The contention that the question as to the legality and the validity of the arbitration agreement must be decided by the Court while appointing an arbitrator is not sustainable. Plainly the earlier decisions to the said effect are no longer be applicable because by virtue of Section 11 (6A) of the Act, the role of the Courts while considering an application under Section 11 is now confined to examining the existence of the arbitration agreement.
Reckitt Benckiser (India) Private Limited vs. Reynders Label Printing India Private Limited and Ors. (2019) 7 SCC62
4 In the wake of the amended Section 11(6) read with Section 11(6A) of the Act, the enquiry by this Court must confine itself to the examination of existence of an arbitration agreement. No more and no less.
The answer to the above confusion may be found in the observations of Justice Nariman in Garware Wall Ropes Ltd. vs. Coastal Marine Constructions and Engineering Ltd. wherein he has tested the validity of an arbitration agreement from the touchstone of the principles of contract law, an arbitration agreement being an independent contract and Section 7 of the 1996 Act which deals with the definition of ‘arbitration agreement’. In terms of Section 7(2) of the 1996 Act, an arbitration agreement may be in the form of an arbitration Clause “in a contract”.
Taking this analogy further, he observed that when an arbitration Clause is contained “in a contract”, it is significant that the agreement only becomes a contract if it is enforceable by law as provided under Section 2(h) of the Indian Contract Act, 1872. Thus, it is reasonable to infer that what Justice Nariman was indicating was that an arbitration clause, being an independent contract, its validity needs to be tested on the anvil of Contract law under which, an agreement does not become a contract, unless it is enforceable in law. Therefore, even a plain reading of Section 11(6A), when read with Section 7(2) of the 1996 Act and Section 2(h) of the Indian Contract Act, 1872 would make it clear that an arbitration Clause in an agreement would not exist when it is not enforceable by law as observed by Justice Nariman.
Thus, what has been observed by Justice Nariman in Garware Wall may be treated as an extension of what has been interpreted in even Duro Felguera and Mayavati. Albeit the plain reading of latter cases does not appears to be propagating the Dual Filter Test, it will be little early to interpret them to be suggesting that while deciding Section 11(6A) both ‘existence’ and ‘validity’ are required to be considered by Court. More so, when the matter pertaining with the Dual Filter Test is already referred to a higher Bench of the Supreme Court by Justice Nariman in Vidya Drolia.
Disclaimer: The views expressed in this post are mine and do not reflect the views of the organisation(s) I am engaged with
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