Arbitration and Conciliation Act: Conundrum in Section 11

M Dhyan Chinnappa

The Supreme Court in United India Insurance Co. Ltd v. Hyundai Engineering and Construction Co., Ltd (UIIC case) has practically restored the law as it stood prior to the amendment to Section 11 of the Arbitration and Conciliation Act, 1996 (Act) by overturning a judgment of the Madras High Court appointing an arbitrator.

The Madras High Court while examining the power of the High Court after the amendment to Section 11 by Act No. 3 of 2016 (with retrospective effect from 23.10.2015) concluded that the power of the High Court is confined to examining the existence of an arbitration agreement.

The issue before the High Court was with respect to a contract of insurance. In the contract, arbitration was permissible only where the insurer had not disputed the liability meaning thereby that the only reference could be with respect to quantum and other such issues which did not involve liability.

Therefore, where liability was not accepted, no reference could be made of such dispute to arbitration. This was a specific defense taken by the insurer in the proceedings before the Madras High Court. The High Court, however, referring to the scope of the power (which is now limited) by virtue of Section 11(6A) concluded that with the determination on the existence of arbitration clause, an arbitrator would have to be appointed leaving open all questions including arbitrability to the arbitrator.

The Supreme Court did not agree. The Supreme Court examined the arbitration clause and the correspondence between the parties.  The Supreme Court concluded that the irrefutable fact that exists in the case is that the liability was repudiated by the insurer meaning thereby that no reference could be made to arbitration. This conclusion of the Supreme Court on a reading of the policy is correct but on principle erroneous given the restrictions on the scope of the power under Section 11(6A) which has been ignored by the Supreme Court.

Historically, courts have struggled with the determination of the power of the Chief Justice under Section 11 of the Act.  The question was first determined to be an administrative power by a Three-Judge bench (Konkan Railways Corporation v. Mehul Constructions), then confirmed by a Five Judge Bench (Konkan Railway Corporation v. Rani Construction) and finally held to be a judicial power by a Seven-Judge Bench. In doing so, the Supreme Court concluded that the power being judicial, the decision on the appointment attains finality.

In SBP & Co v. Patel Engineering (Patel Engineering), it was held that the power of the Chief Justice having been declared to be final, the order was, in fact, a judicial order. The Supreme Court held that the Chief Justice or the designate of the Chief Justice has to consider several issues which include existence and validity of the arbitration agreement, the existence of an arbitrable dispute etc.

In National Insurance Co Ltd v. Boghara Polyfab Pvt Ltd (Boghara Polyfab), the Supreme Court interpreting Patel Engineering classified the matters which the Chief Justice must consider, may consider and should not consider.

What must be considered is whether the proper High Court has been approached and whether there is an arbitration agreement.  What may be considered are whether claims are barred by limitation, dead claims or mutual satisfaction of claims.  What should not be considered are arbitrability of the claims, excluded claims and merits of the claims.

The amendments to the Act by Act No. 3 of 2016 however sought to alter this position. Introduction of sub-section 6A to Section 11 of the Act limits the scrutiny to be made by the High Court or the Supreme Court only to the existence of the arbitration agreement and nothing else.  This would mean that the second and third limbs of Boghara Polyfab case are completely excluded.

The amendment makes this limited scrutiny to be done notwithstanding any judgment of any court which would mean that all issues that were considered, examined and decided by the Supreme Court in Patel Engineering cannot be considered at the time of the appointment of an arbitrator.

In the UIIC case, there was no dispute that there existed an arbitration clause.  The issue was with respect to whether the claims made fall within the scope of the arbitration clause – in other words, whether they are arbitrable or possibly excluded. By examining the arbitration clause and the dispute raised, the Supreme Court delved into the issue of arbitrability – a matter which even in Patel Engineering (as interpreted in Boghara Polyfab) was an issue not to be considered by the Chief Justice.

If the UIIC judgment is correct and the High Court was required to examine the claims made and the disputes that exist, the power of the High Court (even in the new regime) stands enlarged to what the Supreme Court held in the Patel Engineering case. This is precisely what sub-section 6A intended to prevent.

The judgment of the Supreme Court now will create various other problems which will again require an answer:

  1. Discharge of a contract – It is well settled that a contract stands discharged by novation or even by a discharge letter confirming that there exist no claims and the arbitration clause perishes with such discharge. If the Supreme Court is right in entertaining a question of arbitrability as in the UIIC case, the requirement to examine discharge of a contract cannot be excluded. Would the High Court or the Supreme Court be justified in examining this issue?
  2. Limitation, stale claims etc.– Limitation is a mixed question of law and fact; yet in most cases may appear to be apparent. Can the High Court or the Supreme Court go into this question and determine the same under Section 11 on the premise that it would make the entire exercise of arbitration a futile effort?
  3. Excluded claims– As in the UIIC case, there exist several agreements which exclude certain claims. Under the old regime as well, the Supreme Court held that the Chief Justice should not examine that issue; yet in the UIIC case it was examined. Can the Courts now examine this issue at the time of appointment?
  4. Arbitrability– Arbitrability may take many forms – claims under a different contract, excluded claims, claims against a non-party to the arbitration agreement etc. If UIIC is strictly interpreted, the Court can determine the question of arbitrability whilst disposing of applications under Section 11.

A criticism to what is stated above would be as to whether the High Court must appoint an arbitrator even where it notices that certain claims are not legally arbitrable – such as matrimonial disputes, winding up of companies, mortgage issues and other matters which involve rights in rem. Even in these cases, given Section 11(6A), if a party wishes to make a reference to arbitration of cases which are non-arbitrable, it would be at his risk as a Tribunal will be appointed leaving the issue of jurisdiction to the Tribunal.  Award of costs by the Tribunal whilst rejecting claims on the ground of jurisdiction under Section 16 will settle the conundrum.

The amendment was proper. Once the High Court or the Supreme Court determines the existence of an arbitration agreement and nothing else, there is certainty on the issue of the arbitration agreement.  In terms of sub-section 7 to Section 11, this decision is final.  The Tribunal then appointed will consider all other issues in relation to the arbitration. This amendment ensures that a proper balance is drawn between the power to appoint an arbitrator and the power of the arbitrator to decide questions raised including jurisdictional questions under Section 16 of the Act.

The proper course in cases like this would be for the Supreme Court or the High Court to confine the determination simply to the matters covered under Section 11(6A) and proceed to appoint the Tribunal in terms thereof leaving open the question of arbitrability to the Tribunal. Such a course would also be in tune with Section 5 of the Act limiting the intervention of Court except as provided for in the Act. This would also ensure that there is no conflict between the matters to be considered at the time of appointment and determining the question of jurisdiction under Section 16 of the Act.

In my view, Section 11(6A) limits the intervention of the Court significantly and overrules by a legislative process the judgment of the Supreme Court in the case of Patel Engineering. Given this scenario, unless Section 11(6A) is unconstitutional and is held so, the question of acting contrary thereto should not arise.

This should have been the course that the Supreme Court ought to have taken in the UIIC case as there was no dispute with respect to the existence of the arbitration clause. However compelling the facts may have been not to appoint an arbitrator, the scope of the power vested in Section 11 ought not to have been digressed from as a matter of principle. The UIIC case being a judgment of a three-judge bench binds all Courts throughout the country (including the Supreme Court) and will automatically result in huge delays in the appointment of arbitrators.

In the UIIC Case, the judgment opens with the statement – “The conundrum in this appeal” and I would end this with the statement “the conundrum in the law…”.

The author is a Senior Advocate at the Karnataka High Court.

Disclaimer: The views expressed in this article are of the author and Bar & Bench does not necessarily hold the same views. Bar & Bench does not take responsibility for the same.

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