29 September 2021
Introduction
A two judge bench of the Supreme Court has recently passed a landmark judgment, expanding the scope of judicial inquiry under Section 11 of the Arbitration and Conciliation Act, 1996, (“Act”), in DLF Home Developers Limited v. Rajapura Homes Private Limited & Anr[1] and DLF Home Developers Limited v. Begur OMR Homes Private Limited & Anr[2].
The Supreme Court has finally clarified that the Courts are “not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen Arbitrator.” The Courts are, in fact, “obliged to apply their mind to the core preliminary issues, albeit, within the framework of Section 11(6-A) of the Act.” The Supreme Court held that while such a review is not intended to usurp the jurisdiction of the Arbitral Tribunal, it is aimed at streamlining the process of arbitration. As such, “even when an arbitration agreement exists, it would not prevent the Court to decline a prayer for reference if the dispute in question does not correlate to the said agreement.”
Scope of judicial inquiry under Section 11 of the Act – An analysis
The scope of judicial inquiry under Section 11 of the Act has been a vexed question, with no absolute clarity. The Courts have largely held that the scope of inquiry under Section 11 of the Act is limited to the examination of existence of an arbitration agreement.
With the 2015 amendment to the Act, the scope of Section 11 of the Act was restricted to a prima facie determination of whether an arbitration agreement exists, making it peremptory in nature, and requiring the concerned judicial authority to refer the dispute to arbitration, thereby effectively leaving the question of the existence and validity of the arbitration agreement with the Arbitral Tribunal under Section 16 of the Act, and giving supremacy to the principle of kompetenz-kompetenz.
However, recently, the endeavour to balance the scope of judicial review at the pre-arbitral stage vis-à-vis the principle of kompetenz-kompetenz under Section 16 of the Act has become clearer, as is evident from the judicial trend in several Supreme Court as well as High Court judgments.
In Duro Felguera, S.A. v. Gangavaram Port Limited[3], the Supreme Court held that a bare reading of Section 11(6A) of the Act clearly shows that the Courts “should and need only look into one aspect – the existence of an arbitration agreement.” The Supreme Court further held that in making the aforesaid determination, “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”.
It is pertinent to note that in Oriental Insurance Company Limited v. Narbheram Power and Steel (P) Limited[4] and United India Insurance Company Limited and Another Hyundai Engineering & Construction Company Limited and Others[5], being matters in respect of insurance contracts, the Supreme Court held that the issue of non-arbitrability with respect to examining whether the dispute was governed by the arbitration clause, can be examined by the Courts at the reference stage itself. However, in these cases, what was specifically under consideration was an arbitration clause, which would get activated only if an insurer admits or accepts liability. The aforesaid decisions were also relied upon in Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Limited[6], in which the Supreme Court came to a similar finding, in respect of an unstamped document, which, until stamped, could not have come into existence.
Further, in PSA Mumbai Investments PTE. Limited v. Board of Trustees of the Jawaharlal Nehru Port Trust and Another[7], the Supreme Court concluded that the arbitration clause in the request for qualification documents would not be applicable and govern the disputes. However, the said judgment did not pertain to Section 11 of the Act and there was no concluded contract between the parties.
Interestingly, in Brightstar Telecommunications India Ltd. v. Iworld Digital Solutions Private Ltd.[8], the Delhi High Court relied upon the decision in Duro Felguera, and held that the Courts should look beyond the mere existence of the arbitration agreement and examine whether the arbitration clause provides for arbitration, pertaining to the disputes that have arisen between the parties to the agreement. It is pertinent to note that the appeal against the said decision of the Delhi High Court was dismissed by the Supreme Court[9].
Subsequently, in Vidya Drolia and Others v. Durga Trading Corporation[10], a three judge bench of the Supreme Court, while holding that the scope of judicial review and jurisdiction under Sections 8 and 11 of the Act is extremely limited, clarified that (i) at the referral stage, Courts do not perform ministerial functions; (ii) while a prima facie examination does not mean full review, it is done in order to weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes; and (iii) in certain cases, the prima facie examination may require a deeper consideration, however, the Courts ought to “find the right amount and the context when it would examine the prima facie case or exercise restraint.” The Supreme Court further held that the Courts cannot adopt an absolute “hands off” approach, and a limited, yet effective intervention, will only effectuate the arbitration process. The Supreme Court also clarified that the exercise of limited prima facie review does not interfere with the principle of kompetenz-kompetenz and separation.
It is pertinent to note that in Vidya Drolia, Justice Ramana, in his concurring opinion, noted that the scope of a prima facie examination of the validity of an arbitration agreement includes an examination into whether the subject matter of the dispute is arbitrable, however, with the caveat that such an examination is to be limited to ‘rare occasions’.
Despite the aforesaid decisions, there remained a conundrum over the scope of judicial review under Section 11 of the Act, and the ambit of ‘existence of arbitration agreement’. The Courts continued to give a very narrow interpretation to Section 11 of the Act and restricted their powers in referring disputes to arbitration.
However, with the recent decision of the Supreme Court, the scope of Section 11 of the Act stands unequivocally expanded. The Supreme Court has now categorically held that the Courts are required to apply their minds and see whether the dispute in question correlates to the arbitration agreement between the parties, and where there is no correlation, the reference to arbitration can be rejected, despite there being an agreement between the parties.
Conclusion
In view of the foregoing, at the pre-arbitral stage, the Courts have to necessarily decide whether, in fact, there is in existence a valid arbitration agreement and whether the dispute that is sought to be raised before it, is covered by the arbitration clause. The Courts cannot, on the basis of an arbitration agreement produced before it, mechanically refer the dispute to arbitration. The Courts have to pronounce on the arbitrability or non-arbitrability of the dispute being the subject matter of the proceedings as well as are required to see if the agreement contains a clause which provides for arbitration pertaining to the disputes, which have arisen between the parties to the agreement.
It is, therefore, clear that the scope of inquiry under Section 11 includes an inquiry as to whether the disputes between the parties pertain to the arbitration agreement under which a reference to arbitration is being sought. The examination of ‘existence of arbitration agreement’ is incomplete without a determination on the correlation between the disputes and the arbitration agreement. The ruling of the Supreme Court has clarified the position of law and expanded the scope of inquiry under Section 11 of the Act. It will also result in strengthening the arbitration law and prevent parties from misusing the provisions of the Act.
For further information, please contact:
Shikha Tandon, Partner, Cyril Amarchand Mangaldas
shikha.tandon@cyrilshroff.com
[1] Judgment dated September 22, 2021 in Arbitration Petition No. 17 of 2020.
[2] Judgment dated September 22, 2021 in Arbitration Petition No. 16 of 2020.
[3] (2017) 9 SCC 729.
[4] (2018) 6 SCC 534.
[5] (2018) 17 SCC 607.
[6] (2019) 9 SCC 209.
[7] (2018) 10 SCC 525.
[8] 2018 SCC Online Del 13071.
[9] Order dated April 05, 2019 in Brightstar Telecommunications India Ltd. v. Iworld Digital Solutions Private Ltd. (Petition(s) for Special Leave to Appeal (C) Nos. 7995-7996/2019).
[10] (2021) 2 SCC 1.
