Supreme Court: In the light of the “prima facie” test laid down last year in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, the 3-judge bench of RF Nariman*, BR Gavai and Hrishikesh Roy, JJ has held that the Parliament may need to have a re-look at Section 11(7) and Section 37 of the he Arbitration and Conciliation Act, 1996 so that orders made under Sections 8 and 11 are brought on par qua appealability as well.
What do the relevant provisions in question read?
- Power to refer parties to arbitration where there is an arbitration agreement. —
(1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.
(…)
- Appointment of arbitrators. —
(…)
(6) Where, under an appointment procedure agreed upon by the parties, — (a) a party fails to act as required under that procedure; or (b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or (c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment. (6A) 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 subsection (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.
(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to 3 the Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court is final and no appeal including Letters Patent Appeal shall lie against such decision.
Legislative History
Sections 8 and 11 were amended pursuant to a detailed Law Commission Report being the 246th Law Commission Report on Arbitration. Shedding light on the legislative history of the provisions in question, the Court said that when Parliament enacted the 2015 amendment pursuant to the Law Commission Report, it followed the Scheme of the Law Commission’s Report qua Section 8 and Section 37 by enacting the words “….. unless it finds that prima facie no valid arbitration agreement exists……” in Section 8(1) and the insertion of sub-clause (a) in Section 37(1) providing an appeal in an order made under Section 8, which refuses to refer 44 parties to arbitration. However, so far as Section 11(6) and Section 11(6A) are concerned, what was recommended by the Law Commission was not incorporated.
“Section 11(6A) merely confined examination of the Court to the existence of an arbitration agreement. Section 11(7) was retained, by which no appeal could be filed under an order made under Section 11(6) read with Section 11(6A), whether the Court’s determination led to a finding that the arbitration agreement existed or did not exist on the facts of a given case. Concomitantly, no amendment was made to Section 37(1), as recommended by the Law Commission.”
What was held in Vidya Drolia Judgment?
Explaining the scope of the phrase “existence of an arbitration agreement” in Vidya Drolia judgment, the 3-judge bench of NV Ramana*, Sanjiv Khanna** and Krishna Murari, JJ had held that the phrase ‘existence of an arbitration agreement’ in Section 11 of the of the Arbitration and Conciliation Act, 1996, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the arbitral tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.
“An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law.”
On the question as to who decides arbitrability, the Court held that the scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted. Further, the general rule and principle, in view of the legislative mandate clear from the amendments to the of the Arbitration and Conciliation Act, 1996 by Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of nonarbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.
Conclusion
Since, by a process of judicial interpretation, Vidya Drolia has now read the “prima facie test” into Section 11(6A) so as to bring the provisions of Sections 8(1) and 11(6) r/w 11(6A) on par and considering that Section 11(7) and Section 37 have not been amended, an anomaly thus arises.
“Whereas in cases decided under Section 8, a refusal to refer parties to arbitration is appealable under Section 37(1)(a), a similar refusal to refer parties to arbitration under Section 11(6) read with Sections 6(A) and 7 is not appealable.”
Hence, it was held that the Parliament may need to have a re-look at Section 11(7) and Section 37 so that orders made under Sections 8 and 11 are brought on par qua appealability as well.
[Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engineering Pvt. Ltd, 2021 SCC OnLine SC 190, decided on 08.03.2021]
*Judgment by: Justice RF Nariman
Appearances before the Court by:
For appellant: Senior Advocate Shyam Divan
For Respondent: Senior Advocate Dhruv Mehta