In Part I of the post, we discussed the position of law on the “existence” test under Section 11(6A) of the Act. In Part II, we aim to provide context to the developments relating to the provision and understand the larger picture of the judicial trend. But first, on the basis of the decisions discussed in Part I, we have taken the liberty to restate the law below. We acknowledge that this restatement is not watertight but nevertheless, it may be a useful reference that could be revised as the law develops on this point.
§1: The court, when deciding a petition under Section 11 of the Act for the appointment of an arbitrator(s), shall confine to the examination of the existence of the arbitration agreement
§2: When examining the existence of an arbitration agreement, the court may find:
§2-1: whether the arbitration agreement exists in fact (factum of existence); and
§2-2: whether the arbitration agreement exists in law (legal existence), that is:
§2-2-1: whether an arbitration agreement exists that pertains to the dispute(s) which has arisen between the parties to the contract; or
§2-2-2: whether the arbitration agreement is null and void.
§3: Provided, the scope of enquiry of legal existence shall be narrow and that except in an open-and-shut case or when there is no obvious or apparent doubt, all jurisdictional questions of scope remain in the domain of the arbitral tribunal. Further, provided that the scope of enquiry of legal existence under §2-2-2 shall be prima facie.
§4: When appointing an arbitrator(s), the court shall do so on a prima facie satisfaction that an arbitration agreement exists, leaving the final determination to the arbitral tribunal. Such decision is final and no appeal, including Letters Patent Appeal, shall lie against such decision. Except, if the court determines that no arbitration agreement exists as per §2-1 or §2-2, then the determination of the court shall be final and not barred from appeal.
Here, an interesting observation may be made when comparing the pre-2015 Amendment position with the present position. Pre-2015 Amendment, it was generally considered that through SBP and Boghara, the door was left wide open for the court to decide many preliminary aspects, which ordinarily, should have been left to the tribunal. These included the existence of a valid arbitration agreement, existence of a live claim, and whether parties concluded the underlying contract with satisfaction of their mutual rights and obligations. As for issues of the scope of the arbitration agreement and the merits of any claim, these were to be left exclusively to the tribunal.
In comparison, the shift in the present law is remarkable. Post-2015 Amendment, courts have not only determined the factual existence of an arbitration agreement but also its scope, i.e. whether an arbitration agreement is “relatable” to or “pertains to” the dispute(s), while adopting a narrow standard of enquiry (see NCC Ltd.). In addition, courts determine threshold issues of enforceability (i.e. null and void) of the arbitration agreement (see Garware and United India).
We think that the courts have taken a consistent and valid approach vis-à-vis Sections 5 and 16 of the Act. Some may argue that the legislature’s use of the term “existence” in Section 11(6A) was to be understood as confining the court’s examination to the bare factum of existence of an arbitration agreement, while leaving issues of scope, validity, and time-barred claims to the arbitral tribunal. Such a view, however, possibly neglects various other provisions of the Act. Section 7(1), for instance, defines an arbitration agreement as:
“an agreement by the parties to submit … disputes which may arise between them in respect of a defined legal relationship …”
Thus, finding “existence” should not only mean finding the bare factum of the arbitration agreement but also whether it is an agreement by parties to submit disputes in respect of the contract. This explanation also resonates with Section 16, which empowers the tribunal to “rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement.” There is no inclusion of the term “scope,” presumably because “existence” covers issues of scope too, an indication of which appears in Section 16(3) that refers to jurisdictional pleas that the tribunal is exceeding the scope of its authority.
Moreover, where the court makes an appointment under Section 11, the court would have to do so on a prima facie satisfaction that an arbitration agreement exists, leaving the final determination to the arbitral tribunal and only after a narrow standard of enquiry, would a court determine that no arbitration agreement exists. Thus, whichever way it goes, it remains compatible with Sections 5 and 16.
As far as the examination of whether an arbitration agreement is null and void is concerned, we are ambivalent in our opinion. At one level, it makes sense that if the arbitration agreement is undoubtedly null and void, it would be futile to appoint an arbitrator only to arrive at the same conclusion, at the expense of time and cost. Similarly, in this context, the pending decision from the larger bench referred to in Vidya on the inclusion of subject matter arbitrability in the “existence” enquiry is significant. However, we also recognise that giving the court such power, even if the standard is narrow, could be a double-edged sword, which recalcitrant parties may try and abuse. This is coupled by the fact that “null and void” was never introduced by the 2015 Amendment, and if the legislature so intended, it would have introduced the phrase as it did in Sections 16(1)(b) and 45 of the Act. It would seem that the SC may have gone overboard with the introduction of “null and void” in the enquiry into the existence of an arbitration agreement.
Be that as it may, the present position is far away from what Section 11 of the Act may possibly be amended to in the near future. In fact, it was the Justice B.N. Srikrishna Committee, which was set up in 2017 to review the institutionalisation of arbitration in India, which recommended that “to ensure speedy appointment of arbitrators, section 11 may be amended to provide that the appointment of arbitrator(s) under the section shall only be done by arbitral institution(s)…, without the [courts] being required to determine the existence of an arbitration agreement.” This reflects in the Arbitration & Conciliation (Amendment) Bill, 2018 (“Bill”), which repeals Sections 11(6A) and 11(7) (the Bill has been passed by the Lower House of Parliament and is currently in the Upper House).
If, and when, this Bill is passed, it will eliminate judicial supervision under Section 11 and direct all power to the arbitral tribunal, without any judicial determination of any threshold issue of existence. This is problematic in our opinion. Primarily, it would lead to extinguishing justified cases where no arbitration agreement exists, whether factually or legally, including situations where the arbitration agreement is prima facie null and void or pertains to a non-arbitrable subject matter.
We believe that such gateway issues should remain in the quarters of judicial determinations, in order to ensure that there is some balance between courts and arbitral tribunals, which could be achieved through Section 11(6A). Rather than removing Section 11(6A), a better course of action could be improving its import and application through the introduction of an explanation, perhaps on the lines of the one envisaged by the 246th Law Commission. The complete absence of Section 11(6A) could have significant consequences, including unnecessary expenditure of time and costs, and forcing a party to go through an arbitration proceeding, or any part of it, even when the party had a genuine case against arbitration that was determinable by a court at the threshold stage all along. Referring parties to arbitration has serious civil consequences procedurally and substantively and thus, court supervision under Section 11 is an essential parameter that must not be removed.
So, is Section 11(6A) suffering from an ‘existential’ crisis? Keeping aside the fact that the provision may not exist at all if the 2018 Bill is passed in its current form, it is evident that the seemingly innocuous term “existence” in the context of judicial appointment of arbitrators has provided much food for thought. Indian courts have been responsible for steering the development of the country’s arbitration law and providing much-needed guidance, especially in the recent past; however, when it comes to the scope of judicial intervention under Section 11, the courts may not have offered as much clarity or consistency with international practice as one desires. While we have been able to reconcile the courts’ decisions after Duro and believe they have a common thread, differing views exist and whether our analysis is an accurate reflection of the judicial intention is anyone’s guess. To conclude, Section 11(6A) has proven to be troublesome and fascinating, and its future, both legislative and judicial, is definitely worth observing.
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To add to the post: In United India Insurance v. Antique Art Exports, decided just a few days before Garware, a division bench of the SC took the view that Section 11(6A) did not prevent a court from denying a reference to arbitration if it was clear that no dispute existed to be arbitrated in the first place. Briefly, this case related to an insurance claim, which the insured accepted as full and final settlement of its claim but subsequently, after eleven weeks, claimed that it gave its acceptance under coercion and undue influence. The SC held that the insured company had not made out its claim with evidence and therefore, the insurance claim was settled.
Like in United India (although the SC did not cite it), the SC found the exposition in Duro to be a “general observation” and that the Court in Duro appointed an arbitrator to determine the dispute given the facts and circumstances involved. In the present case, the SC held that the appointment of an arbitrator is a judicial, and not an administrative function (a distinction sought to be drawn in SBP and Boghara Polyfab), “leaving some degree of judicial intervention when it comes to the question to examine the existence of a prima facie arbitration agreement” and that “it is always necessary to ensure that the dispute resolution process does not become unnecessarily protracted”.
Note that Garware did not cite this decision.
It appears that by this amendment, we are entering into the arena of ‘Konkan Railway Corporation Ltd. & … vs Rani Construction Pvt. Ltd on 30 January, 2002’, where the Constitution Bench, inter alia, held that ” There is nothing in Section 11 that requires the party other than the party making the request to be noticed. It does not contemplate a response from that other party. It does not contemplate a decision by the Chief Justice or his designate on any controversy that the other party may raise, even in regard to its failure to appoint an arbitrator within the period of thirty days. That the Chief Justice or his designate has to make the nomination of an arbitrator only if the period of thirty days is over does not lead to the conclusion that the decision to nominate is adjudicatory. In its request to the Chief Justice to make the appointment the party would aver that this period has passed and, ordinarily, correspondence between the parties would be annexed to bear this out. This is all that the Chief Justice or his designate has to see” and done away with NOTICE to other party considering that it is an administrative order.
Seven Member Bench in S.B.P. & Co vs Patel Engineering Ltd. & Anr on 26 October, 2005, while overruling this judgement, held that “It is fundamental to our procedural jurisprudence, that the right of no person shall be affected without he being heard. This necessarily imposes an obligation on the Chief Justice to issue notice to the opposite party when he is moved under Section 11 of the Act. The notice to the opposite party cannot be considered to be merely an intimation to that party of the filing of the arbitration application and the passing of an administrative order appointing an arbitrator or an arbitral tribunal. It is really the giving of an opportunity of being heard” and further held that such an order is a judicial order.
The proposed amendment will bring back what is undone by the Supreme Court in SBP. Any appointment made by such institution, is nothing but an executive/administrative order but can never be equated with a judicial order amenable to appeal leading to further litigation.
Further, an additional forum (arbitral institution) will be introduced burdening the parties and the parties are at the whims and fancies of this institution.
The Supreme Court has foreseen these kind of issues and in SBP case observed that “There have been cases where claims for appointment of an arbitrator based on an arbitration agreement are made ten or twenty years after the period of the contract has come to an end. There have been cases where the appointment of an arbitrator has been sought, after the parties had settled the accounts and the concerned party had certified that he had no further claims against the other contracting party. In other words, there have been occasions when dead claims are sought to be resurrected. There have been cases where assertions are made of the existence of arbitration agreements when, in fact, such existence is strongly disputed by the other side who appears on issuance of notice. Controversies are also raised as to whether the claim that is sought to be put forward comes within the purview of the concerned arbitration clause at all. The Chief Justice has necessarily to apply his mind to these aspects before coming to a conclusion one way or the other and before proceeding to appoint an arbitrator or declining to appoint an arbitrator. Obviously, this is an adjudicatory process”….
Perhaps, purpose for the amendment for creating an arbitral institution is to un burden the High Courts and Supreme Court, but in my opinion it leads to more litigation, more time consuming in litigation and definitely goes against the intent and purport of the Act itself.
But don’t you think that the gateway against the non-existent agreement is still allowed in section 8?
Unlike Section 11, S.8 is unequivocally restricted to ‘prima facie’ existence. Courts have interpreted it to indicate a peremptory rule (see P. Anand Gajapathi Raju vs PVG Raju; Rashtriya Ispat Nigam vs Verma Transport etc.)