Expression 'existence of Arbitration agreement' in Section 11 of Arbitration Act includes aspects of validity of agreement

BACKGROUND

• 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.

• In the case of Vidya Drolia and others v Durga Trading Corporation bench observed that "Existence and validity are knotted, and arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal requirements. Invalid agreement is no agreement"

• 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.

• It was hold by Justice Khanna that 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.

• He added that 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.

WHAT IS SECTION 11(6) and 8(1) OF ARBITRATION ACT

• SECTION 11(6) OF ARBITRATION ACT -Where, under an appointment procedure agreed upon by the parties, -

(a) a party fails to act as required under that procedure; or
(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.

• 8(1) OF ARBITRATION ACT- A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

JUSTICE RAMANA’s DECISION

• Sections 8 and 11 of the Act have the same ambit with respect to judicial interference

• 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.

• 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.

• 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'.

• The scope of the Court to examine the prima facie validity of an arbitration agreement includes only: Whether the arbitration agreement was in writing or was contained in exchange of letters, telecommunication or if core contractual ingredients qua the arbitration agreement were fulfilled or whether the subject­ matter of dispute is arbitrable

• It was concluded that 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.

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