A case to confine inquiry at the stage of appointing Arbitral Tribunal

Introduction

The Arbitration & Conciliation Act, 1996 ('the Principal Act') was enacted as a part of economic reforms. It aimed at ensuring that arbitration proceedings are just, fair and effective; and to minimize the intervention of the courts.

Under the Principal Act when Parties are unable to secure appointment of arbitral Tribunal as per agreed procedure, the power to make appointment, is vested in the Chief Justice of the High Court, in case of domestic arbitration; and in Chief Justice of the Supreme Court, in case of international arbitration[1].

What delayed appointment

Initially, a view prevailed that the power of the Chief Justice to appoint arbitral Tribunal was administrative in nature, and while appointing an arbitral Tribunal he did not act as a judicial authority[2].

Nearly a decade after the enactment of the Principal Act, in SBP & Co. v. Patel Engineering[3] a Bench of 7 Judges of Supreme Court by a majority of 6:1 held that while appointing arbitral Tribunal, the Chief Justice discharges judicial or a quasi judicial function, and not merely an administrative act. This enlarged the scope of inquiry by Chief Justice, while deciding an application for appointing arbitral Tribunal.

In National Insurance Co. Ltd., v. Boghara Polyfab Pvt. Ltd.[4], the Supreme Court pointed out that for deciding an application for appointing arbitral Tribunal, following three categories of preliminary issues could arise:

i) issues which the Chief Justice or his designate is bound to decide, like:

(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 for appointment, is a party to such an agreement.

ii) issues which Chief Justice could either decide or leave to be decided by the arbitral Tribunal like:

(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.

iii) issues which should be left to the Arbitral Tribunal to decide:

(a) 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).
(b) Merits or any claim involved in the arbitration.

In Bharat Rasiklal Ashra v. Gautham Rasiklal Ashra & Anr.[5], the court reiterated that the question whether there is an arbitration agreement is a jurisdictional issue and unless there was valid arbitration agreement, the application for appointment could not be maintained.

In SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.[6], the Supreme Court held that before an Arbitral Tribunal could be appointed, the applicant should satisfy the Chief Justice that the arbitration agreement is available. It held that when an instrument is relied upon as containing the arbitration agreement, the Chief Justice had to consider whether the instrument was properly stamped. If it was not properly stamped, the court could act upon such instrument or the arbitration clause therein, unless the deficit stamp duty and penalty were paid as per the governing law.

The original provision and the judicial interpretation thereof lead to the Parties opposing appointment of arbitral Tribunal, by raising objections as to the existence / validity of arbitration agreement, including on the ground that the same was insufficiently stamped. Adjudication of said objections by already overburdened courts used to considerably delay the appointment.

2015 Amendment

To address the above, the Arbitration & Conciliation Amendment Act, 2015 introduced a provision[7] that the court while considering application for appointment of Arbitral Tribunal, shall confine to the examination of the existence of an arbitration agreement ('the Amendment'). On a first blush it appeared that with the Amendment, the court while appointing an Arbitral Tribunal could no longer go into the issues such as sufficiency of stamp etc.

Judicial interpretations proved 2005 amendment to be ineffective

A division bench of the Supreme Court in Duro Felguera, S.A. v. Gangavaram Port Ltd.[8] regarding the effect of the Amendment held as under:

'From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one aspect—the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple—it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.'

However, a three judge Bench in United India Insurance v. Hyundai Engineering and Construction Co. Ltd.[9], distinguished and clarified Duro Felguera, S.A. when it held:

'The exposition in this decision is a general observation about the effect of the amended provision and not specific to the issue under consideration.' The court, in effect held that even where arbitration agreement exist, the amendment did not preclude the Chief Justice to refuse appointment of arbitration where the dispute was excepted and hence not arbitrable. This runs counter to the exposition in National Insurance Co. Ltd., v. Boghara Polyfab Pvt. Ltd. that whether a claim falls within the arbitration clause is an issue which should be left to the Arbitral Tribunal to decide.

In a subsequent decision in Vidya Drolia and Others v. Durga Trading Corporation[10], a Division Bench of Supreme Court, having referred to Duro Felguera, S.A. held:

'.... It will be noticed that 'validity' of an arbitration agreement is, therefore, apart from its 'existence'. One moot question that therefore, arises, and which needs to be authoritatively decided by a Bench of three learned Judges, is whether the word 'existence' would include weeding-out arbitration clauses in agreements which indicate that the subject-matter is incapable of arbitration….'. Thus the issue whether amended procedure for appointment requires the Chief Justice to refuse appointment on the ground that subject-matter is incapable of arbitration is to be decided by a larger bench.

Now, in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd.[11] a Division Bench of the Supreme Court has held that an arbitration clause in an agreement would not exist when it is not enforceable by law. Consequently it held that unless the agreement duly stamped, the arbitration clause would not exist. Thus, the question whether a Contract is required to be stamped and if so whether the stamp paid is sufficient, would have to be gone into by the court before making appointment.

The decisions as aforesaid prove the Amendment which confined the scope of consideration by Chief Justice while making appointment to existence of arbitration agreement, ineffective. The Chief Justice continues to be enjoined to examine if the document which contains the arbitration agreement, is sufficiently stamped. The Chief Justice is required to consider if the arbitration agreement does not cover the claim raised or the claim constitutes an excepted matter. The Chief Justice may also be required to consider if the subject matter is incapable of arbitration.

The examination of these aspects may often be time consuming as the same may involve consideration of complex facts and a wide array of laws. As such, consideration of such matters should better be left for consideration by the Arbitral Tribunal. Otherwise, it would be difficult to eliminate delay at the stage of making appointment.

Need for further Amendment

A further amendment to the Principal Act is already in offing[12]. It is imperative that amendment is also made to expressly confine the scope of inquiry by Chief Justice while appointing Arbitral Tribunal, to whether arbitration agreement exists physically and in fact, leaving the issue of admissibility on the ground of insufficient stamping to be determined by the Arbitral Tribunal itself. Similarly, once arbitration agreement is found to exist, the further consideration whether the disputes raised / claims made are covered by the same and / or are arbitrable, can also be left for determination by the Arbitral Tribunal.

[1] Section 11 of the Principal Act
[2] In Konkan Railway Corporation Ltd. v. Mehul Construction Co. (2000) 7 SCC 201 and Konkan Railway Corporation Ltd. v. Rani Construction (P) Ltd. (2002) 2 SCC 388
[3] (2005) 8 SCC 618
[4] (2009) 1 SCC 267
[5] (2012) 2 SCC 144
[6] (2011) 14 SCC 66
[7] Section 11(6A) to the Principal Act
[8] (2017) 9 SCC 729
[9] 2018 SCC OnLine SC 1045
[10] 2019 SCC OnLine SC 358
[11] 2019 SCC OnLine SC 515
[12] Arbitration & Conciliation (Amendment) Bill, 2018