- Apprentice Lawyer
In what seems like eons ago, a Constitution Bench of seven judges of the Supreme Court, in the case of SBP & Co. v. Patel Engineering, authoritatively determined the scope and operation of the erstwhile Section 11 of the Arbitration and Conciliation Act, 1996.
Most notably, SBP held that the powers exercised by a court while dealing with an application under Section 11 are ‘judicial powers’ and not merely ‘administrative powers’ as previously held by a three- judge Bench in Konkan Railway Corporation Ltd & Ors v. Mehul Construction Co. and subsequently affirmed by a Constitution Bench of five judges in Konkan Railway Corporation Ltd Anr v. Rani Construction Pvt. Ltd.
By definition, “administer” connotes any act done “to manage or to conduct”. Therefore, an administrative power is a power usually exercised for directing, managing, conducting or superintending the execution of any proceeding. It is in the nature of an executive or a ministerial action.
As opposed to this, a ‘judicial’ exercise is an exercise “involving judgment or discretion; as distinguished from a ministerial act”. Therefore, the consequence of the decision in SBP is that all powers exercised by the courts under Section 11(6) of the Act would require the application of judicial mind and exercise of judgment by the courts.
As it has since transpired, the decision in SBP turned out to be a litigating lawyer's delight, in that it broadened the scope of the authority exercised by courts while adjudicating a petition for appointment of arbitrators. It also paved the way for several objections being raised by parties at the stage of consideration of an application under Section 11(6).
Issues such as limitation, existence of live disputes, res judicata, and all manner of objections were routinely taken at the Section 11 stage of arbitration. This was considered contrary to the objectives of the Act, and the principles of ‘least judicial intervention’ as enshrined under Section 5 of the Act.
In view of the ensuing barrage of cases raising all manner of preliminary objections to the appointment of arbitrators in Section 11 proceedings, the Supreme Court in the case of National Insurance Co. Ltd v. Boghara Polyfab (P) Ltd. proceeded to categorize the issues that ‘must’ be addressed, ‘may’ be addressed and ‘cannot/ must not’ be addressed in Section 11 proceedings. The Court held asunder:
“The issues (first category) which the Chief Justice/his designate will have to decide are:
(a) Whether the party making the application has approached the appropriate High Court.
(b) Whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement.
The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are:
(a) Whether the claim is a dead (long-barred) claim or a live claim.
(b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.
The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are:
(i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration).
(ii) Merits or any claim involved in the arbitration.”
Therefore, certain preliminary objections relating to issues of limitation, discharge of agreement by accord, and satisfaction were held to be issues that may be considered by the courts during adjudication of Section 11 petitions.
The decision in Boghara Polyfab was further refined in Union of India v. Master Construction Company to the extent that it was held that the concerned court should, at the very least, prima facie ascertain whether or not a dispute is bona fide or genuine before appointment of an arbitrator.
The list of objections permissible at the stage of Section 11 petition have continued to be regularly pruned by the Apex Court. For instance, in Indian Oil Corpn. Ltd. v. SPS Engg.Ltd.,while dealing with an objection to appointment of an arbitrator, on the ground of res judicata, the Court held that any objection that would require detailed consideration of the material on record ought not to be examined under Section 11. Examination under Section 11 could only extend to issues that would ex-facie render it infeasible or impermissible to refer a matter to arbitration.
Similarly, objections concerning arbitrability, or whether a claim falls in the category of ‘excepted matters’ were also held to be issues that could not be decided in Section 11 proceedings. However, the position remained that objections were considered on a case-to-case basis by the courts and there existed no standardized formula.
In August 2014, the Law Commission of India proposed numerous changes in the Act. One such change was the insertion of Section 11(6A) ,whereby the scope of examination in Section 11 proceedings was proposed to be restricted to the ‘examination of existence of the arbitration agreement.’ Based on the recommendations of he Commission, the Arbitration and Conciliation Amendment Act, 2015 was passed and sub-section 6A was inserted, confining the scope and ambit of Section 11 proceedings.
It is this provision of the Act that has since been the subject of divergent views in various decisions of the Supreme Court, some of which have been discussed in this article.
In Duro Felguera, SA v. Gangavaram Port Limited, a two-judge Bench of the Apex Court, while deciding on the question of appointment of arbitrator, interpreted Section 11 (6A) of the Act in its literal sense to hold that the courts are required to only identify the existence of the arbitration agreement, and having done so, the agreement is to be given effect to. No other issue can be considered or should be considered by the courts in view of the insertion of Section 11(6A).
Soon after the decision in Duro Felguera, two three-judge Bench decisions of the Supreme Court took divergent views, first, in Oriental Insurance Company Ltd. v. Nabheram Powerand Steel Private Ltd. and second, in United India Insurance Company Ltd. and Anr. v. Hyundai Engineering and Construction Company Ltd. and Ors..
In both decisions, the Court, despite identifying the existence of an arbitration agreement, proceeded to examine whether or not the requirements for giving effect to the said agreements had been fulfilled in the facts of the case. In both cases, having found that the contractually stipulated pre-conditions for giving effect to the arbitration clause had not been met, the Court refused reference to arbitration. In doing so, the Court once again expanded the permissible scope of examination in Section 11 proceedings.
The course adopted in Narbheram Power and Hyundai Engineering may, however, have its basis in the terminology adopted in Section 11(6A). The Section uses the term ‘examination’ of ‘existence’ of an Arbitration agreement. Examination, by its very definition means a “detailed inspection or study”. Therefore, it would manifestly be something more than mere identification of an arbitration agreement. This is more so when the power exercised by a court in Section 11 proceedings continues to be a ‘judicial power.’
Further, ‘existence’ of an arbitration agreement may also not also be read to mean mere physical existence, but something that is effective, and in-force at the time of its invocation. Viewing Section 11(6A) from this perspective may perhaps provide leeway in seeking a deeper examination into the objections that may be raised at the stage of appointment of arbitrator.
In NCC Ltd. v. Indian Oil Corporation Ltd., the appointment of an arbitrator was objected to on the ground that only ‘notified claims’ under the agreement could be referred to arbitration and that the conditions for invocation of arbitration clause had not been fulfilled in the facts of the case. While the Court was pleased to reject the objections to appointment citing the narrow scope of examination permissible under Section 11(6A), it notably observed that the issue as to whether or not a dispute sought to be referred to arbitration, is at all relatable to the arbitration agreement, “is an aspect which is implicitly embedded in Subsection (6A) of Section 11 of the 1996 Act.”
Therefore, apart from a rule of prudence that would warrant reference to arbitration in cases where there are disputed questions of facts, t was held that Section 11(6A) would not per se bar courts from extending consideration to issues beyond mere identification of an arbitration agreement. However, it is to be noted that a challenge to the decision in NCC Ltd. vs IOC Ltd. is pending before the Supreme Court.
Similar views have been echoed in the case of Prime Market Reach Pvt. Ltd. v. Supreme Advertising Ltd. where the Court, after examining the validity of the arbitration clause, held the clause tobe invalid and refused reference to arbitration. In Western Constructions v. Eden Buildcon, despite returning a categorical finding regarding the existence of a valid arbitration agreement, the Court rejected the reference to arbitration by holding that the disputes raised were “not covered by the arbitration clause and are therefore not arbitrable.”
Most recently, a three-judge Bench of the Supreme Court in M/s Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman expressly held that the court’s role in a proceeding under Section 11 of the Act is only limited to examination of existence of an arbitration agreement and all other objections are for the arbitrator to consider. It remains to be seen whether there will be any further developments as far as the issue of scope of examination under Section 11 proceedings is concerned.
Finally, it is relevant to mention that most of the developments set out hereinabove may be rendered moot with the impending notification of the amendment to Section 11 by way of Arbitration and Conciliation (Amendment) Act, 2019. While certain provisions of the Amendment Act have been notified with effect from August 2019, amendment to Section 11 is yet to be notified.
The Amendment proposes the designation of ‘Arbitral Institutions’ with the objective of doing away with the court's intervention in matters concerning appointment of arbitrators. It will be interesting to see how the process of designation pans out as and when the provisions come into effect. Until then, Section 11(6A) as it stands, continues to be a delight for the litigating lawyers, with new and innovative objections being raised, all in a bid to get a foot in the door that has almost surely been shut firmly by the decision in Mayavati Trading.
The author is an Advocate practicing in the Delhi High Court and the Supreme Court of India.