The Existential Conundrum Of An Arbitration Agreement

The Existential Conundrum Of An Arbitration Agreement

On 18th July 2018, a bill titled The Arbitration and Conciliation (Amendment) Bill, 2018 was introduced in the Lok Sabha. The Bill intended to bring out several changes to the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "the Arbitration Act"). One of the most significant changes was to be made to Section 11 of the Arbitration Act which was to be amended by Clause 3 of the Bill. As per clause 3 (i), for international commercial arbitrations, appointments of arbitrators were to be made by an institution designated by the Supreme Court and for domestic arbitrations, by an institution designated by the concerned High Court. The proviso to clause 3 (i) states that in the event no arbitral institutions are available, the Chief Justice of the concerned High Court may maintain a panel of arbitrators for discharging the functions and duties of the arbitral institution and any reference to the arbitrator shall be deemed to be an arbitral institution for the purposes of Section 11. The newly inserted Section 11 (6-A) which confines the Supreme Court or High Court's role "to the examination of the existence of an arbitration agreement" in an application filed by a party under Section 11(4),(5) or (6) was omitted by clause 3(v) of the Bill since an arbitration institution or panel would have appointed arbitrators instead of the Court. The bill was passed by the Lok Sabha on 10th August 2018. However, since it was not passed in the Rajya Sabha, with the dissolution of the Sixteenth Lok Sabha, the bill has now lapsed. Nevertheless, perusal of paragraph 4 of Bill's Statement of Objects and Reasons (hereinafter referred to as "SOR") makes it amply clear that the legislative intent was to "minimize the need to approach the Courts for the appointment of arbitrators".

This bill to certain extent improved upon the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter referred to as the "2015 Amendment") which had inserted Section 11 (6-A). The legislative intent behind Section 11(6-A) can be found clause 6(iv) of the SOR of the 2015 Amendment which states that "while considering any application for appointment of arbitrator, the High Court or the Supreme Court shall examine the existence of a prima facie arbitration agreement and not other issues." The expression prima facie though does not feature in the text of Section 11(6-A). All that the said sub-section states is that the Court while considering an application under Section 11 should "confine to the examination of the existence of an arbitration agreement." In the author's opinion, though the intent behind inserting Section 11(6-A) is laudable, the use of the expression "existence" in the said sub-section has widened the scope of Court interference and has in effect defeated the purpose behind its insertion. Through this column, the author attempts to suggest an alternate interpretation of the said sub-section which, until omitted, will continue to remain in the statute book. However, before putting forth his interpretation, the author would briefly like to examine some recent judgments delivered on the effect of the insertion of Section 11 (6-A).

JUDICIAL INTERPRETATION OF SECTION 11(6-A)

  1. Perhaps one of the first Supreme Court judgments that referred to Section 11(6-A) was delivered by the three-judge Bench of the Honourable Supreme Court in July 2017. In TRF Limited v. Energo Engineering Projects Limited [(2017) 8 SCC 377, 401 paragraph 42,43] the Court made a passing reference to Section 11(6-A) in a matter relating to disqualification of an arbitrator under Section 12(5) of the Arbitration Act. However, the Court did not interpret the said sub-section as it wasn't warranted.

  1. Shortly thereafter, in October 2017, a two-Judge Bench of the Supreme Court in Duro Felguera S.A. v. Gangavaram Port Ltd. [(2017) 9 SCC 729] (hereinafter referred to as "Duro Felguera") considered the effect of Section 11(6-A) in detail. In a concurring judgment, Kurian Joseph J., (as he then was) was of the opinion that after the 2015 Amendment,

"59. …. all that the Courts need to see is whether an arbitration agreement exists - nothing more, nothing less. The legislative policy and purpose is essentially to minimize the Court's intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11 (6A) ought to be respected." (italics and emphasis supplied)

  1. However in May 2018, a three-Judge Bench of the Supreme Court in Oriental Insurance Company Ltd. v. Nardheram Power and Steel Private Limited [(2018) 6 SCC 534, 547] (hereinafter referred to as "Oriental Insurance") while strictly interpreting an arbitration clause in an insurance policy opined in paragraph 23 as under:

"If a clause stipulates that under certain circumstances there can be no arbitration, and they are demonstrably clear then the controversy pertaining to the appointment of arbitrator has to be put to rest."

Though the Supreme Court was not interpreting Section 11(6-A), the judgment of Oriental Insurance was one of the judgments that formed the basis for another decision by the very same three-Judge Bench in United Insurance Company Ltd. v. Hyundai Engineering and Construction Company Ltd. and others [ 2018 SCC OnLine SC 1045] (hereinafter referred to as "United Insurance") delivered in August 2018. The Supreme Court in United Insurance had the task of interpreting a similar insurance policy containing an arbitration clause that stated that no difference or dispute shall be arbitrable if the insurance company had disputed or not accepted liability under or in respect of the insurance policy. After relying on the judgment in Oriental Insurance, the three-Judge Bench in United Insurance distinguished Duro Felguera and held that the matter before it was not arbitrable as the insurance company had in fact raised a dispute. It is pertinent to note that in United Insurance, the Supreme Court decided whether or not the dispute should be referred to arbitration or not at the stage of Section 11 itself and it refused to appoint an arbitrator who could have also decided "existence or validity" of the said arbitration agreement/clause under Section 16. (The scope of Section 16 will be examined in the latter portion of this column.)

  1. Fast forward six months later to 8th February 2019, when the Delhi High Court in
    NCC Ltd. v. Indian Oil Corporation Ltd.
    (ARB.P 115/2018) splendidly interpreted and analyzed the effect of the insertion of Section 11(6-A) after referring to Duro Felguera, Oriental Insurance and United Insurance. The relevant portion of the judgment of the Delhi High Court reads thus:

59.1 ……To my mind, once the Court is persuaded that it has jurisdiction to entertain a Section 11 petition all that it is required to examine, is, as to whether or not an arbitration agreement exists between the parties which is relatable to the dispute at hand. The latter part of the exercise adverted to above, which, involves correlating the dispute with the arbitration agreement obtaining between the parties, is an aspect which is implicitly embedded in Subsection (6A) of Section 11 of the 1996 Act, which, otherwise, requires the Court to confine its examination only to the existence of the arbitration agreement. Therefore, if on a bare perusal of the agreement, it is found that a particular dispute is not relatable to the arbitration agreement, then, perhaps, the Court may decline the relief sought for by a party in a Section 11petition. However, if there is a contestation with regard to the issue as to whether the dispute falls within the realm of the arbitration agreement, then, the best course would be to allow the Arbitrator to form a view in the matter.

59.2 Thus, unless it is, in a manner of speech, a chalk and cheese situation or a black and white situation without shades of grey, the concerned Court hearing the Section 11 petition should follow the more conservative course of allowing parties to have their say before the Arbitral Tribunal." (emphasis supplied)

The Delhi High Court states two important things: (1) If on a bare perusal, it is found that a dispute is not related to the arbitration agreement, then the Court may decline relief under Section 11. (2) This is however with a caveat, namely, when the parties contest whether a dispute falls within the realm of the arbitration agreement or not, then the best course would be to allow the Arbitrator to decide the issue. In this authors opinion, the interpretation by the Delhi High Court on Section 11(6-A) is spot on and is the most precise.

  1. On 28th February 2019, twenty days after the Delhi High Court delivered the aforesaid judgment, a two-Judge Bench of the Supreme Court in
    Vidya Drolia and others v. Durga Trading Corporation
    (Civil Appeal No. 2402 of 2019) (hereinafter referred to as Vidya Drolia) had the occasion to interpret an arbitration clause in a Tenancy Agreement between a landlord and tenant and whether such a dispute could be arbitrated upon in the face of a decision of a coordinate bench of the Supreme Court in Himangi Enterprises v. Kamaljeet Singh Ahluwalia
    [ (2017) 10 SCC 706] (hereinafter referred to as "Himangi Enterprises"). The Supreme Court in Himangi Enterprises had held that in cases where the Transfer of Property Act, 1882 applied between a landlord and a tenant, such disputes between parties are not arbitrable. After referring to Section 11 (6-A), Section 16, the relevant portion of the 246th Law Commission Report, and
    Duro Felguera
    , the Supreme Court in paragraph 7 of Vidya Drolia "noticed that "validity" of an arbitration agreement is, therefore, apart from its "existence" " and the Court was of the opinion that a Bench of three Judges needs to authoritatively decide "whether the word "existence" would include weeding-out arbitration clauses in agreements which indicate that the subject-matter is incapable of arbitration." Thus the expression "existence" used in Section 11(6-A) and Section 16 will now be interpreted by a three-Judge Bench of the Supreme Court.

  1. A day after the Supreme Court delivered its judgment in Vidya Drolia, the Full Bench of the Bombay High Court reserved its judgment on 1st March 2019 on a reference made to it on the interpretation of Section 11(6-A) in
    Vijay Sharma v. Vivek Makhija and anr
    (Arbitration Application No. 300 of 2018). The issue in Vijay Sharma (supra) was whether in view of Section 11 (6-A) it would be necessary for the Court passing final orders under Section 11(6) to await the adjudication by stamp authorities in a case where a document containing an arbitration clause is not properly stamped. The other issue before the Full Bench in the connected matter of
    Gautam Landscapes Pvt. Ltd. v. Shailesh S. Shah
    (Arbitration Petition No. 466 of 2017) was whether a Court can grant interim or ad-interim relief in an application under Section 9 of the Arbitration Act when a document containing an arbitration clause is unstamped or insufficiently stamped. The judgment was delivered by the Full Bench on 4th April 2019. The Full Bench after considering Section 11 (6-A) and
    TRF Limited, Duro Felguera
    and Vidya Drolia came to the conclusion that it would not be necessary for the Court hearing an application under Section 11(6) to await the adjudication by the stamp authorities in a case where a document containing an arbitration clause is not properly stamped. The Full Bench in paragraph 102 of its judgment was of the view that pursuant to Section 11(6-A) being imported into the Arbitration Act the issue of "sufficiency or otherwise" of stamp duty on the said agreement "can be left to the decision of the arbitral tribunal." The Full Bench also held that a Court can grant interim or ad-interim relief under Section 9 of the Arbitration Act when a document containing an arbitration clause is unstamped or insufficiently stamped.

  1. No sooner did the Full Bench of the Bombay High Court deliver its judgment than the same was partially overruled by the Supreme Court vide a judgment dated 10th April 2019, delivered in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. (Civil Appeal No. 3631 of 2019 paragraph 25) (hereinafter referred to as "Garware"). The Supreme Court in the said case was hearing an appeal that arose out a decision of the Bombay High Court in
    Coastal Marine Constructions & Engineering Ltd. v. Garware Wall Ropes Ltd.
    (MANU/MH/0416/2018) in which the Single Bench of the High Court had held that the Court can refer disputes to arbitration if a document containing an arbitration clause is unstamped. Allowing the appeal and setting aside the decision of the Single Bench of the Bombay High Court, the Supreme Court in
    Garware
    (supra) held in paragraph 27,

"….the High Court must impound the instrument which has not borne stamp duty and hand it over to the authority under the Maharashtra Stamp Act, who will then decide issue qua payment of stamp duty and penalty (if any) as expeditiously as possible, and preferably within a period of 45 days from the date on which the authority receives the instrument. As soon as stamp duty and penalty ( if any) are paid on the instrument, any of the parties can bring the instrument to the notice of the High Court, which will then proceeding to expeditiously hear and dispose of the Section 11 application."

The Supreme Court in Garware (supra) in paragraph 24 also held that the arbitration clause contained in the sub-contract in the said case "would not "exist" as a matter of law until the sub-contract is duly stamped…." (emphasis and italics supplied). In the very same paragraph, the Court also stated,

"The argument made that Section 11(6-A) deals with "existence", as opposed to Section 8, Section 16, and Section 45, which deal with "validity" of an arbitration agreement is answered by this Court's understanding of the expression "existence" in United India Insurance Co. (supra), as followed by us."

  • A SUGGESTED INTERPRETATION

In the author's opinion, a restrictive interpretation of Section 11(6-A) is absolutely essential not only to minimize Court interference but to also accelerate the arbitration proceedings that may be stalled at the stage of Section 11 itself. In the author's opinion:

  1. "Existence" in Section 11(6-A) should be interpreted to mean de facto existence or actual or physical existence and not de jure existence or existence in law as has been interpreted by the Supreme Court in United Insurance (supra) and Garware (supra). By not interpreting the expression "existence" as de facto or physical existence, the scope of the said sub-section will be considerably widened to include challenges by contesting parties regarding survival of claims, arbitrability of disputes, objections regarding unstamped documents containing arbitration clauses etc. All these issues can be raised before the Arbitrator under Section 16 and should not be raised before the High Court or the Supreme Court under Section 11. The Court examining an arbitration agreement should only see whether there is an arbitration agreement that factually exists before it and should go no further.

  1. The words used in Section 11 (6-A) are "confine to the examination of the existence of an arbitration agreement." Unlike Section 16 (1) which uses the words "the arbitration agreement", sub-clause 6-A uses the article "an arbitration agreement". In the author's opinion, the use of the article "an" signifies that at the stage of Section 11, the Court only has to examine whether in the Arbitration Petition/Application filed before it, the arbitration clause (being a part of the contract) or the arbitration agreement is annexed to the said Petition/Application. Once the Court is satisfied that there is an arbitration clause/agreement in existence in the Petition/application before it, it should appoint an arbitrator immediately.

  1. Section 16 of the Arbitration Act gives an opportunity to parties to challenge the jurisdiction of the arbitrator and also enables parties to raise objections with respect to the "existence or validity of the arbitration agreement." The comparison between Section 11(6-A) and Section 16 would show that Section 16 is much wider is scope than Section 11 (6-A) and the expression "existence" in Section 11(6-A) cannot be widened to the extent that it is at power with the expression "existence" in Section 16(1). This would defeat the entire purpose of Section 16. The Court under Section 11 and the Arbitrator under Section 16 ought not to have concurrent jurisdiction to decide on the "existence" of the arbitration agreement. Hence, "existence" in Section 11(6-A) has to be interpreted differently from "existence" in Section 16.

  1. It may be argued that if the Courts interpret the expression "existence" as de facto or physical existence, it would amount to the Courts adding words into a section that is contrary to the settled rules of interpretation of statutes. However, as had been stated in the five-Judge Bench decision in Union of India v. Hansoli Devi and others [ (2002) 7 SCC 273, 281 paragraph 9],

"if on going through the plain meaning of the language of statutes, it leads to anomalies, injustices and absurdities, then the Court may look into the purpose for which the statute has been brought and would try to give a meaning, which would adhere to the purpose of the statute." (emphasis and italics supplied)

As per paragraph 6 (iii) of the SOR of the 2015 Amendment, the reason for amending the Arbitration Act was to expeditiously dispose of applications for appointment of an arbitrator by the High Court or Supreme Court. Hence, the interpretation suggested can certainly be given by the Courts to Section 11(6-A) to "adhere to the purpose of the statute."

CONCLUSION

The very purpose of the Arbitration and Conciliation (Amendment) Bill, 2018 was change the present system of appointment of arbitrators by the Courts to a system where the appointment of arbitrators takes places by arbitral institutions. (see paragraph 5(i) of the SOR of the 2018 Bill). It is difficult to ascertain when such an amendment to the Arbitration Act is likely to take place in the near future. However, till such an amendment comes into effect, Section 11 (6-A) will continue to remain in "existence". Perhaps the interpretation suggested by the author to the expression "existence" in Section 11(6-A) could be one such way in which the role of the Court is kept to a bare minimum while passing orders in Petitions/Applications filed under Section 11.

The Author is an independent practitioner at the Bombay High Court. He can be contacted at dormaandalal@gmail.com .