Expression 'Existence Of Arbitration Agreement' In Section 11 Of Arbitration Act Includes Aspect Of Validity Of Agreement : Supreme Court

The Supreme Court has held that the expression 'existence of arbitration agreement' in Section 11 of the Arbitration Act would include the aspect of validity of arbitration agreement.

A three-judge bench of the Court also explained that at the stages of Sections 8 and 11 of the Act, the Courts should undertake a prima facie examination of the validity of the arbitration agreement.

"Existence and validity are intertwined, and arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal requirements. Invalid agreement is no agreement", observed a bench comprising Justices NV Ramana, Sanjiv Khanna and Krishna Murari in the case Vidya Drolia and others v Durga Trading Corporation.

The bench was essentially answering a reference made to it by a division bench on the issue whether landlord-tenant disputes under the Transfer of Property Act are arbitrable. While holding that such disputes can be subject matter of arbitration when they are not covered by rent control laws, the Court also discussed issues relating to the stage when the question of arbitrability can be decided, the scope of examination under Sections 8/11 etc.

"The courts at the referral stage do not perform ministerial functions. They exercise and perform judicial functions when they decide objections in terms of Sections 8 and 11 of the Arbitration Act", the main judgment authored by Justice Khanna observed.

Prima Facie examination under Section 8

The Court noted that Section 8(1), after the 2016 amendment, enjoins the Court to undertake a prima facie examination as to the validity of the agreement.

The judgment of Justice Sanjiv Khanna explained the scope of prima facie examination as follows :"

"Prima facie case in the context of Section 8 is not to be confused with the merits of the case put up by the parties which has to be established before the arbitral tribunal. It is restricted to the subject matter of the suit being prima facie arbitrable under a valid arbitration agreement. Prima facie case means that the assertions on these aspects are bona fide"(Paragraph 86)

"Prima facie examination is not full review but a primary first review to weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes. The prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straight forward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage.

Only when the court is certain that no valid arbitration agreement exists or the disputes/subject matter are not arbitrable, the application under Section 8 would be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts.Referral proceedings are preliminary and summary and not a mini trial"(Paragraph 87)

"Accordingly, when it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the arbitral tribunal selected by the parties by consent. The underlying rationale being not to delay or defer and to discourage parties from using referral proceeding as a rue to delay and obstruct. In such cases a full review by the courts at this stage would encroach on the jurisdiction of the arbitral tribunal and violate the legislative scheme allocating jurisdiction between the courts and the arbitral tribunal. Centralisation of litigation with the arbitral tribunal as the primary and first adjudicator is beneficent as it helps in quicker and efficient resolution of disputes"(Paragraph 89).

'Existence of arbitration agreement' under Section 11

The judgment noted that sub-section 6A inserted in Section 11 as per 2016 amendment prescribed that the Court, at the stage of appointment of arbitrator, should confine itself to the examination of the existence of an arbitration agreement. This means that the 'existence of arbitration agreement' was meant to be a question to be decided at the stage of Section 11.

However, sub-section 6A was omitted after the 2019 amendment. But this omission was is in view of the introduction of a new regime of institutionalized arbitration.

The report of the Justice B N Srikrishna commission, which recommended the 2019 amendment, was referred to in that regard as follows :

"After the Amendment Act of 2019, Section 11 (6-A) has been omitted because appointment of arbitrators is to be done institutionally, in which case the Supreme Court or the High Court under the old statutory regime are no longer required to appoint arbitrators and consequently to determine whether an arbitration agreement exists".

Based on this, the judgment observed :

"Omission of sub-section (6-A) by Act 33 of 2019 was with the specific object and purpose and is relatable to by substitution of sub-sections (12), (13) and (14) to Section 11 of the Arbitration Act by Act 33 of 2019, which, vide sub-section (3A) stipulates that the High Court and this court(Supreme Court) shall have the power to designate the arbitral institutions".

The Court noted with approval that it has been held in Mayavati Trading Pvt. Ltd. v.Pradyuat Deb Burman(2019) that the omitted sub-section (6-A) to Section 11 of the Arbitration Act would continue to apply and guide the courts on its scope of jurisdiction at stage one, that is the pre-arbitration stage.

In this backdrop, the Court proceeded to explain how the question of 'existence of agreement' will include its validity as well.

"Existence of an arbitration agreement presupposes a valid agreement which would be enforced by the court by relegating the parties to arbitration.

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", Justice Khanna's judgment said in paragraph 92.

Since Sections 8 and 11 are complementary provisions, the Court said that it can read the mandate of valid arbitration agreement in Section 8 into mandate of Section 11, that is,'existence of an arbitration agreement'.

The judgment opined that the exercise of prima facie power of judicial review as to the validity of the arbitration agreement would save costs and check harassment of objecting parties when there is clearly no justification and a good reason not to accept plea of non-arbitrability.

The judgment of Justice Khanna summarized the conclusion in Paragraph 95, based on the reasons given in paragraph 92, as follows :

"Accordingly, we hold that the expression 'existence of an arbitration agreement' in Section 11 of the Arbitration Act,would include aspect of validity of an arbitration agreement,albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment. 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".

Justice Ramana's separate judgment

The separate but concurring judgment penned by Justice N V Ramana summarized the conclusions as follows :

(a)Sections 8 and 11 of the Act have the same ambit with respect to judicial interference

(b)Usually, subject matter arbitrability cannot be decided at the stage of Sections 8 or 11 of the Act, unless it's a clear case of deadwood.

(c)The Court, under Sections 8 and 11, has to refer a matter to arbitration or to appoint an arbitrator, as the case maybe, unless a party has established a prima facie(summary findings) case of non­existence of valid arbitration agreement, by summarily portraying a strong case that he is entitled to such a finding.

(d) The Court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis, as laid down above, i.e., 'when in doubt, do refer'.

(e) The scope of the Court to examine the prima facie validity of an arbitration agreement includes only:

1. Whether the arbitration agreement was in writing?or
2. Whether the arbitration agreement was contained in exchange of letters, telecommunication etc?
3. Whether the core contractual ingredients qua the arbitration agreement were fulfilled?
4. On rare occasions, whether the subject­ matter of dispute is arbitrable?

Justice Ramana observed that though the statutory language of Section 8 and 11 are different, however materially they do not vary and both Sections provide for limited judicial interference at reference stage.

"Courts, while analyzing a case under Section 8, may choose to identify the issues which require adjudication pertaining to the validity of the arbitration agreement. If the Court cannot rule on the invalidity of the arbitration agreement ona prima facie basis, then the Court should stop any further analysis and simply refer all the issues to arbitration to be settled", Justice Ramana said in his judgment.

Other reports based on the judgment :

Landlord-Tenant Disputes Under Transfer Of Property Act Arbitrable Except When Covered By Rent Control Laws : Supreme Court

Allegations Of Fraud Arbitrable When They Relate To Civil Dispute: Supreme Court Overrules 'N Radhakrishnan' Judgment

Disputes Which Are To Be Adjudicated By DRTs Are Not Arbitrable: Supreme Court Overrules 2012 Delhi HC Judgment

CASE: VIDYA DROLIA vs. DURGA TRADING CORPORATION [ CIVIL APPEAL NO. 2402 OF 2019 ]

CORAM: Justices NV Ramana, Sanjiv Khanna and Krishna Murari

Click here to read/download the judgment