14 January 2022
Background
Kompetenz-kompetenz, allowing the arbitral tribunal to rule on its own jurisdiction, is one of the fundamental principles of arbitration. In Indian arbitration law, this is captured in Section 16 of the Arbitration and Conciliation Act, 1996 (“Act”). This is further emphasised in Indian Farmer Fertilizer Cooperative Limited v. Bhadara Products (2018) 2 SCC 534 (“IFFCO Judgment”), wherein the Supreme Court has held that ‘jurisdiction’ mentioned in Section 16 has reference to three things: (1) existence of a valid arbitration agreement, (2) whether arbitral tribunal is properly constituted and (3) whether matters submitted to arbitration are in accordance with the arbitration agreement. Clearly, the existence of a valid arbitration agreement falls within the scope of jurisdictional matters to be determined by the arbitral tribunal.
Despite this, however, Indian jurisprudence has historically permitted extensive scrutiny by courts at the stage of reference to arbitration, including an examination of not only the existence and validity of the arbitration agreement but also the arbitrability of the subject matter of the dispute. It was in this context that the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”) was passed. The 2015 Amendment modified the structure of the Act in line with the pro-arbitration policy adopted by the government and substantially curtailed judicial interference at the reference stage. However, even post the amendment, the extent to which a court must examine the existence and validity of an arbitration agreement at a pre-arbitral stage remained contested.
The Vidya Drolia Judgment
This controversy was laid to rest to an extent by a three-judge bench of the Supreme Court in Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1 (“Vidya Drolia Judgment”). In this case, the Court examined the question of who decides non-arbitrability. The Court found that issues of non-arbitrability can be raised at three stages, namely –
-
Before the court on an application for reference under Section 11 of the Act or for stay of pending judicial proceedings and reference under Section 8 of the Act
-
Before the arbitral tribunal during the course of the arbitration proceedings (i.e., under Section 16 of the Act)
-
Before the court at the stage of the challenge to the award or its enforcement
The Court went on to examine the jurisdiction of the court to scrutinise non-arbitrability at the first look or the referral stage under Section 8 (i.e., at the time of reference to arbitration where an arbitration agreement exists) or Section 11 (i.e., at the time of appointment of arbitrators). The Court held that a court in exercise of its jurisdiction under Section 8 or Section 11 of the Act is only required to take a prima facie view on the issue of arbitrability and not a final view as the arbitral tribunal is empowered to decide this issue under Section 16.
The Court elaborated that a prima facie examination is not a full review but a primary first review to weed out manifestly and ex-facie non-existence and invalid arbitration agreements and non-arbitrable disputes. At this stage, the court should not decide debatable questions of facts, as referral proceedings are preliminary and summary and not a mini trial. While in some cases the court may, to prevent wastage of public and private resources, exercise judicial discretion to conduct an intense yet summary prima facie review, it must remain conscious that it is to assist the arbitration procedure and not usurp jurisdiction of the arbitral tribunal. The Court must balance the twin objectives of avoiding arbitration-obstructing tactics at referral stage, and protecting parties from being forced to arbitrate when a matter is clearly non-arbitrable.
Accordingly, at the referral stage, a party seeking reference to arbitration only needs to demonstrate that prima facie, a valid arbitration agreement is in existence. It follows that a party seeking to oppose the reference to arbitration has to discharge the heavy burden of showing that even prima facie, an arbitration agreement cannot be said to be in existence. If such party cannot satisfy the court of the same, then the matter has to be necessarily referred to the arbitral 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 arbitral tribunal with judicial interference.
Applicability to Section 9 Petitions
The Supreme Court in both the IFFCO Judgment and Vidya Drolia Judgment cited above has clearly emphasized the primary role of the arbitral tribunal in determining inter alia the existence and validity of an arbitration agreement and the arbitrability of the subject matter of the dispute. In the Vidya Drolia Judgment, the Supreme Court further set out clear boundaries for the extent of scrutiny of an arbitration agreement to be done by Courts at the referral stage, i.e., when dealing with a petition under Section 8 or Section 11 of the Act.
Objections as to the existence of a valid arbitration agreement are often raised by respondents in petitions for interim relief under Section 9 of the Act filed prior to the commencement of arbitral proceedings. In such Section 9 proceedings, parties contesting the same regularly challenge the maintainability of the said proceedings on the ground that there is no valid arbitration agreement in existence.
In such a case, that is, of a Section 9 petition filed before commencement of arbitral proceedings, the ‘referral stage’ contemplated in the Vidya Drolia Judgment has not even arrived. Such a situation has not been envisaged in the scheme set out in the Vidya Drolia Judgment. The question arises therefore, as to the extent to which courts must scrutinise such a challenge on the basis of arbitrability, in a Section 9 petition.
Prior to the 2015 Amendment, the position was set out by the Supreme Court in SBP & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618, which permitted extensive judicial inquiry at the referral stage. The Supreme Court held that in such a case of a Section 9 petition wherein arbitrability / existence or validity of an arbitration agreement is challenged, the Court necessarily has to decide whether it has jurisdiction, whether there is an arbitration agreement which is valid in law and whether the dispute sought to be raised is covered by that agreement. The Court further held that there is no indication in the Act that the power of the court is curtailed on these aspects merely because the arbitral tribunal has competence to rule on its own jurisdiction under Section 16 of the Act.
However, pursuant to the 2015 Amendment, it is clear that the principles laid down in the Vidya Drolia Judgment, curtailing the power of the court, ought to be extended to such cases of Section 9 petitions filed before the commencement of arbitration as well. The same rationale that is applicable to a reference to arbitration under Section 8 or Section 11 would be applicable to a Section 9 petition where the existence of a valid arbitration agreement is challenged. It is of equal importance that a Court while examining a Section 9 petition does not get lost in the thicket of deciding debatable questions of fact, where no prima facie case can be established by the respondent contesting arbitrability. The concern that undertaking a detailed long-drawn review would obstruct and cause delay, thereby undermining the integrity and efficacy of arbitration as a dispute resolution mechanism is applicable equally in the case of a Section 9 petition as for applications under Section 8 or Section 11.
Moreover, such a reading of the principles laid down in the Vidya Drolia Judgment would be in consonance with the changes made by the 2015 Amendment whereby the scope for judicial interference under Section 9 was limited and the power of the arbitral tribunal under Section 17 was expanded. This was done to encourage parties to seek interim relief from the arbitral tribunal under Section 17 instead of approaching the court under Section 9.
For further information, please contact:
Vineet Unnikrishnan, Partner, Cyril Amarchand Mangaldas
vineet.unnikrishnan@cyrilshroff.com
