NON- ARBITRABILITY: REFERENCE ANSWERED
Shubham Budhiraja[1]
Vidya Drolia v. Durga Traders[2]
Topic: Section 8, Section 11, Section 16 and Section 34, Issue of Non- arbitrability, principle of competence- competence, International approach, Indian approach, etc.
1. Non-
arbitrability may arise because of following reasons
-
Right in rem and there is no subordinate
personam rights
-
Public Policy
-
Sovereign functions
-
Implied Non- arbitrability through statute
barring jurisdiction of act + various factors such as doctrine of election, position
of parties if they are commercial parties or vulnerable consumers who can have
no choice but to refer to consumer forum
2. Non-
arbitrability of claim and Non- arbitrability of subject matter are two
different matters where former is in fact and later is in law.
3. There
is no one line answer to who decide the arbitrability. The issue of Non-
arbitrability can be decided at 3 stages
-
Reference stage
-
Before arbitral tribunal
-
Appeal stage
4. The deciding of non- arbitrability at reference stage by the court doesn’t affect the principle of Competence-Competence.
5. At reference stage either section 8 or Section 11, the non- arbitrability can be decided under guise of “existence” only if it is prima facie. The referral court cannot do mini-trial. Some of non- arbitrability is prima facie such as Insolvency, winding-up, affect 3rd parties, etc. whereas dispute of facts in contractual should not be decided at reference stage rather at stage-2.
6. The arbitration clause can be read narrowly or broadly or none but Intention of parties depends who are the parties and what is subject matter of transaction. If it is commercial then broadly read.
7. The
Language of Section 8 and Section 11 even though are differently worded but in
essence limited prima facie judicial review can be exercised at this stage
because unnecessary dragging party to arbitration when the agreement itself is
not enforceable document will not make any sense.
EXPLICITY AND IMPLICIT NON-ARBITRABILITY
In SBP & Co. v. Patel Engineering
Ltd. and Another, the majority judgment
of the Constitution Bench of seven Judges had noticed the complementary
nature of Sections 8 and 11 of the Arbitration Act, and has observed: “16. We
may at this stage notice the complementary nature of Sections 8 and 11. Where
there is an arbitration agreement between the parties and one of the parties,
ignoring it, files an action before a judicial authority and the other party
raises the objection that there is an arbitration clause, the judicial
authority has to consider that objection and if the objection is found
sustainable to refer the parties to arbitration. The expression used in this
section is “shall” and this Court in P. Anand Gajapathi Raju v. P.V.G. Raju and
in Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums has held that
the judicial authority is bound to refer the matter to arbitration once the
existence of a valid arbitration clause is established. Thus, the judicial
authority is entitled to, has to and is 15 (2005) 8 SCC 618 19 bound to decide
the jurisdictional issue raised before it, before making or declining to make a
reference. Section 11 only covers another situation. Where one of the parties
has refused to act in terms of the arbitration agreement, the other party moves
the Chief Justice under Section 11 of the Act to have an arbitrator appointed
and the first party objects, it would be incongruous to hold that the Chief Justice
cannot decide the question of his own jurisdiction to appoint an arbitrator
when in a parallel situation, the judicial authority can do so. Obviously, the
highest judicial authority has to decide that question and his competence to
decide cannot be questioned. If it is held that the Chief Justice has no right
or duty to decide the question or cannot decide the question, it will lead to
an anomalous situation in that a judicial authority under Section 8 can decide,
but not a Chief Justice under Section 11, though the nature of the objection is
the same and the consequence of accepting the objection in one case and
rejecting it in the other, is also the same, namely, sending the parties to
arbitration. The interpretation of Section 11 that we have adopted would not
give room for such an anomaly.”
The scope and ambit of court’s jurisdiction
under Section 8 or 11 of the Arbitration Act is similar. An
application under Section 11 of the Arbitration Act need not set out in detail
the disputes or the claims and may briefly refer to the subject matter or broad
contours of the dispute. However, where judicial proceedings are initiated and
pending, specific details of the claims and disputes are normally pleaded and,
therefore, the court or the judicial authority has the advantage of these details.
There is a difference between a non-arbitrable
claim and non-arbitrable subject matter. Former may arise on account
of scope of the arbitration agreement and also when the claim is not capable of
being resolved through arbitration. Generally non-arbitrability of the subject matter would
relate to non-arbitrability in law.
The Arbitration Act clearly
recognizes and accepts that certain disputes or subjects are not capable of
being resolved by arbitration. Similarly, Section 34(2)(b)(i) of the
Arbitration Act states that the courts may set aside awards when they find that
“subject matter of the dispute is not
capable of settlement by arbitration”. However, the two sub-sections
conspicuously do not enumerate or categorize non-arbitrable matters or state
the principles for determining when a dispute is non-arbitrable by virtue of
any other law17 for the time being in force. It is left to the courts by ex
visceribus actus to formulate the principles for determining non-arbitrability
Booz Allen & Hamilton Inc. states that civil or commercial
dispute, whether contractual or non-contractual, which can be decided by a
court, is in principle capable of being adjudicated and resolved by an arbitral
tribunal unless the jurisdiction of the arbitral tribunal is either expressly
or by necessary implication excluded. Legislature is entitled to exclusively reserve
certain category of proceedings for public forums, be it a court or a forum
created or empowered by the State to the exclusion of private forum. Exclusion
of the jurisdiction of the arbitral tribunal are matters of public policy. When
public policy mandates and states that a case or a dispute is non-arbitrable, the court would
not allow an application under Section 8 (or even Section 11 as observed supra)
even if the parties have agreed upon arbitration as the mechanism for
settlement of such disputes.
Booz Allen & Hamilton Inc. draws a distinction between actions
in personam, that is, actions which determine the rights and interests of
parties themselves in the subject matter of the case, and actions in rem which
refer to actions determining the title of the property and the rights of the
parties not merely amongst themselves but also against all the persons at any
time claiming an interest in that
property. Rights in personam are considered to be amenable to arbitration and
disputes regarding rights in rem are required to be adjudicated by the courts
and public tribunals. The latter actions are unsuitable for private
arbitration. Disputes relating to subordinate rights in personam arising from
rights in rem are considered to be arbitrable Landlord-tenant disputes governed by rent control legislation are not
actions in rem, yet they are non-arbitrable.
Law and Practice of Commercial Arbitration in England (2nd Ed. 1989)
by Mustill and Boyd which states that certain types of remedies which the arbitrator
can award are limited by consideration of public policy and as arbitrator is
appointed by the parties and not by the State. Arbitrator cannot
impose fine, give imprisonment, commit a person for contempt or issue a writ of
subpoena nor can he make an award binding on third parties and affect public at
large, such as a judgment in rem
Mustill and Boyd in their 2001 Companion Volume have
observed that axiomatically rights that are valid as against the whole world,
cannot be a subject of private arbitration, although subordinate rights in
personam derived from such rights may be ruled upon by the arbitrators. Therefore, rights
under a patent license may be arbitrated but the validity of the underlying
patent may not be arbitrable. Similarly, an arbitrator who derives
its power from a private agreement between A and B, plainly has no jurisdiction
to bind a third person by a decision on whether the patent is valid or not, for
no one else has mandated him to make the
decision and the decision which attempts to do so would be useless
Analysing provisions of Order XXXIV of the Code of Civil Procedure,
1908, Booz Allen & Hamilton Inc. holds that this Order not only
relates to execution of a decree, it provides for preliminary and final decrees
to satisfy the substantive rights of mortgagees with reference to their
mortgage security. The provisions of Transfer of Property Act read with the
Code relating to mortgage suits makes it clear that all persons having interest
either in the mortgage security or in the right of redemption have to be joined
as parties whether they are parties to the mortgage or not. The object of the
provisions is to avoid multiplicity of suits/proceedings and to enable all the
interested persons to raise their defences and claims, which are to be taken
note of while dealing with the claim in the mortgage suit. By passing a
preliminary decree or final decree, the court adjudicates, adjusts and
safeguards the interests of not only the mortgager or mortgagee but also
puisne/mesne mortgagees, persons entitled to the equity of redemption, persons
having an interest in the mortgaged property, auction-purchasers and persons in
possession, which an arbitral tribunal
cannot do. Therefore, a suit for foreclosure or redemption of
mortgage property can be dealt with by a public forum and not by a private
forum.
In Vimal Kishor Shah disputes relating to private trusts,
trustees, and beneficiaries of the trust and the Trusts Act were held to be
non-arbitrable. The Order of Reference explains why disputes under the Trusts
Act are non-arbitrable by necessary implication, for which reference was made
to few sections of the Trusts Act to demonstrate how the disputes could not be
made the subject matter of arbitration.
Emaar MGF Land Limited, the Division Bench referred to the object
and the purpose behind the Consumer Protection Act, 1986 as a law that meets the long-felt necessity of
protecting the common man as a consumer against wrongs and misdeeds for which
the remedy under the ordinary law has become illusory as the enforcement
machinery does not move, or moves ineffectively or inefficiently. Thus, to
remove helplessness and empower consumers against powerful businesses and the
might of the public bodies, the enactment has constituted consumer forums with
extensive and wide powers to award, wherever appropriate, compensations to the consumers
and to impose penalties for noncompliance with their orders. The Consumer
Protection Act has 30 specific provisions for execution and effective
implementation of their orders which powers are far greater than the power of
the ordinary civil court. After referring to the amendments made to Sections 8
and 11 of Arbitration Act by Act No. 3 of 2016, it was observed that the amendments cannot
be given such expansive meaning so as to inundate entire regime of special
legislation where such disputes are not arbitrable. This amendment
was not intended to side-line or override the settled law on non-arbitrability. Neither the
workmen nor consumers can waive their right to approach the statutory judicial
forums by opting for arbitration
In Olympus Superstructures Pvt. Ltd., this Court had held
that an arbitrator can grant specific performance as there is no prohibition in
the Specific Relief Act, 1963
A judgment is a formal expression of conclusive
adjudication of the rights and liabilities of the parties. The judgment may
operate in two ways, in
rem or in personam. A judgment in rem determines the status of a
person or thing as distinct from the particular interest in it of a party to
the litigation; and such a judgment is conclusive evidence for and against all
persons whether parties, privies or strangers of the matter actually decided.
Such a judgment “settles the destiny of the res itself” and binds all persons
claiming an interest in the property inconsistent with the judgment even though
pronounced in their absence. By contrast, a judgment in personam, “although it
may concern a res, merely determines the rights of the litigants inter se to
the res”. Distinction between judgments in rem and judgments in personam turns
on their power as res judicata, i.e. judgment in rem would operate as res judicata against the world, and
judgment in personam would operate as res judicata only against the parties in
dispute
Many a times, a right in rem results in an enforceable right in
personam. Booz Allen & Hamilton Inc. refers to the statement by
Mustill and Boyd that the subordinate rights in personam derived from rights in
rem can be ruled upon by the arbitrators, which is apposite. Therefore, a claim
for infringement of copyright against a particular person is arbitrable, though
in some manner the arbitrator would examine the right to copyright, a right in
rem. Arbitration by necessary
implication excludes actions in rem
Arbitration is unsuitable when it has erga
omnes effect, that is, it affects the rights and liabilities of
persons who are not bound by the arbitration agreement. Equally arbitration as
a decentralized mode of dispute resolution is unsuitable when the subject
matter or a dispute in the factual background, requires collective adjudication
before one court or forum
Certain disputes as a class, or sometimes the dispute in the given facts, can
be efficiently resolved only through collective litigation proceedings.
Contractual and consensual nature of arbitration underpins its ambit and scope.
Authority and power being derived from
an agreement cannot bind and is non-effective against
non-signatories. An arbitration agreement between two or more
parties would be limpid and inexpedient in situations when the subject matter
or dispute affects the rights and interests of third parties or without
presence of others, an effective and enforceable award is not possible. Prime
objective of arbitration to secure just, fair and effective resolution of
disputes, without unnecessary delay and with least expense, is crippled and
mutilated when the rights and liabilities of persons who have not consented to
arbitration are affected or the collective resolution of the disputes by
including non-parties is required. Arbitration agreement as an alternative to public fora should
not be enforced when it is futile, ineffective, and would be a no result
exercise
Sovereign functions of the State being
inalienable and nondelegable are non-arbitrable as the State alone has the exclusive right and duty
to perform such functions. For example, it is generally accepted that monopoly
rights can only be granted by the State. Correctness and validity of the State
or sovereign functions cannot be made a direct subject matter of a private
adjudicatory process
Implied legislative intention to exclude
arbitration can be seen if it appears that the statute creates a special right
or a liability and provides for determination of the right and liability
to be dealt with by the specified courts or the tribunals specially constituted
in that behalf and further lays down that all questions about the said right
and liability shall be determined by the court or tribunals so empowered and
vested with exclusive jurisdiction. Therefore, mere creation of a specific
forum as a substitute for civil court or specifying the civil court, may not be
enough to accept the inference of implicit non-arbitrability. Conferment of jurisdiction on a specific
court or creation of a public forum though eminently significant, may not
be the decisive test to answer and
decide whether arbitrability is impliedly barred
Implicit non-arbitrability is
established when by mandatory law the
parties are quintessentially barred from contracting out and waiving the
adjudication by the designated court or the specified public forum. There is no choice. The person who
insists on the remedy must seek his remedy before the forum stated in the
statute and before no other forum
Doctrine of election. There are
three elements of election, namely, existence of two or more remedies; inconsistencies between such remedies and a choice
of one of them. If anyone of the three elements is not there, the
doctrine will not apply. According to American Jurisprudence, 2d, Vol. 25, p.
652, if in truth there is only one remedy, then the doctrine of election does
not apply. In the present case, as stated above, the NPA Act is an additional
remedy to the DRT Act. Together they constitute one remedy and, therefore, the
doctrine of election does not apply. Even according to Snell's Principles of
Equity (31st Edn., p. 119), the doctrine
of election of remedies is applicable only when there
are two or more co-existent remedies available to the litigants at the
time of election which are repugnant and inconsistent. In any event, there is
no repugnancy nor inconsistency between the two remedies, therefore, the doctrine of election has no application.”
Doctrine of election to select arbitration
as a dispute resolution mechanism by mutual agreement is available only if the
law accepts existence of arbitration as an alternative remedy and freedom to
choose is available. There should not be any inconsistency or
repugnancy between the provisions of the mandatory law and arbitration as an
alternative. Conversely and in a given case when there is repugnancy and
inconsistency, the right of choice and election to arbitrate is denied. This
requires examining the “text of the statute, the legislative history, and
‘inherent conflict’ between arbitration and the statute’s underlying purpose”29
with reference to the nature and type of special rights 29 Jennifer L. Peresie,
Reducing the Presumption
of Arbitrability. conferred
and power and authority given to the courts or public forum to effectuate and
enforce these rights and the orders passed. When arbitration cannot enforce and
apply such rights or the award cannot be implemented and enforced in the manner
as provided and mandated by law, the right of election to choose arbitration in
preference to the courts or public forum is either completely denied or could
be curtailed. In
essence, it is necessary to examine if the statute creates a special right or
liability and provides for the determination of each right or liability by the
specified court or the public forum so constituted, and whether the remedies
beyond the ordinary domain of the civil courts are prescribed. When the answer is affirmative, arbitration in the
absence of special reason is contraindicated. The dispute is nonarbitrable
In M.D. Frozen Foods Exports Private Limited and Others v. Hero
Fincorp Limited, 30 and following this judgment in Indiabulls Housing Finance
Limited v. Deccan Chronicle Holdings Limited and Others, 31 it has been
held that even prior arbitration proceedings are not a bar to proceedings under
the NPA Act. The NPA Act sets out an
expeditious, procedural methodology enabling the financial institutions to take
possession and sell secured properties for non-payment of the dues. Such
powers, it is obvious, cannot be exercised through the arbitral proceedings.
Non-arbitrability may arise in case the implicit prohibition
in the statute, conferring and creating special rights to be adjudicated by the
courts/public fora, which right including enforcement of order/provisions
cannot be enforced and applied in case of arbitration. To hold that the claims
of banks and financial institutions covered under the DRT Act are arbitrable
would deprive and deny these institutions of the specific rights including the
modes of recovery specified in the DRT Act. Therefore, the claims covered by
the DRT Act are non-arbitrable as there is a prohibition against waiver of jurisdiction
of the DRT by necessary implication. The legislation has overwritten the
contractual right to arbitration
In terms of the mandate of Section 89 of the
Civil Procedure Code and the object and purpose behind the Arbitration Act and
the mandatory language of Sections 8 and 11, the mutually agreed
arbitration clauses must be enforced. The language of Sections 8 and 11 of the
Arbitration Act are peremptory in nature. Arbitration Act has been enacted to
promote arbitration as a transparent, fair, and just alternative to court
adjudication. Public policy is to encourage and strengthen arbitration to
resolve and settle economic, commercial and civil disputes. Amendments from
time to time have addressed the issues and corrected the inadequacies and flaws
in the arbitration procedure. It is for the stakeholders, including the
arbitrators, to assure that the arbitration is as impartial, just, and fair as
court adjudication. It is also the duty of the courts at the post-award stage
to selectively yet effectively exercise the limited jurisdiction, within the
four corners of Section 34(2)(b)(ii) read with Explanation 1 and 2 and check
any conflict with the fundamental policy of the applicable law.
The principle of party autonomy goes hand in hand with the principle
of limited court intervention, this being the fundamental principle
underlying modern arbitration law. Party autonomy is weaker in non- negotiated
“take it or leave it” contracts and, therefore, the legislature can through
statutes shield the weakest and vulnerable contracting parties like consumers.
This is not so in negotiated agreements or even in adhesion contracts having an
arbitration clause in commercial settings. Virtues of commercial and civil
arbitration have been recognised and accepted and the courts even encourage the
use of arbitration.
Fourfold test
for determining when the subject matter of a dispute in an arbitration
agreement is not arbitrable
(1) when
cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to
subordinate rights in personam that arise from rights in rem.
(2) when cause of action and subject matter of the
dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication
would not be appropriate and enforceable;
(3) when
cause of action and subject matter of the dispute relates to inalienable sovereign and public
interest functions of the State and hence mutual adjudication would be
unenforceable; and
(4) when
the subject-matter of the dispute is expressly
or by necessary implication non-arbitrable as per mandatory statute(s).
These tests are not watertight
compartments; they dovetail and overlap, albeit when applied holistically and
pragmatically will help and assist in determining and ascertaining with great
degree of certainty when as per law in India, a dispute or subject matter is
non-arbitrable. Only when the answer
is affirmative that the subject matter of the dispute would be non-arbitrable
However, the aforesaid principles
have to be applied with care and caution
Applying the above principles to determine non-arbitrability, it is
apparent that
Insolvency or intracompany disputes have to be addressed by a centralized forum, be the
court or a special forum, which would be more efficient and has complete
jurisdiction to efficaciously and fully dispose of the entire matter. They are
also actions in rem.
Similarly, grant and issue of patents and
registration of trademarks are
exclusive matters falling within the sovereign or government functions and have
erga omnes effect. Such grants
confer monopoly rights. They are non-arbitrable.
Criminal cases again are not arbitrable as they relate to sovereign
functions of the State. Further, violations of criminal law are offenses
against the State and not just against the victim.
Matrimonial disputes relating to the dissolution of marriage, restitution
of conjugal rights etc. are not arbitrable as they fall within the ambit of
sovereign functions and do not have any commercial and economic value. The
decisions have erga omnes effect.
Matters relating to probate, testamentary
matter etc. are actions in rem and
are a declaration to the world at large and hence are non-arbitrable
Landlord-tenant disputes governed by the
Transfer of Property Act are arbitrable as they are not actions in rem but
pertain to subordinate rights in personam that arise from rights in
rem. Such actions normally would not affect third-party rights or have erga
omnes affect or require centralized adjudication. An award passed deciding landlord-tenant disputes can be executed and
enforced like a decree of the civil court. Landlord-tenant disputes do not
relate to inalienable and sovereign functions of the State. The provisions of
the Transfer of Property Act do not expressly or by necessary implication bar
arbitration. Transfer of Property Act, like all other Acts, has a public
purpose, that is, to regulate landlordtenant relationships and the arbitrator
would be bound by the provisions, including provisions which enure and protect
the tenants. landlord-tenant disputes
are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration. However, landlord-tenant disputes covered and governed by
rent control legislation would not be arbitrable when specific court or forum
has been given exclusive jurisdiction to apply and decide special rights and
obligations. Such rights and obligations can only be adjudicated and
enforced by the specified court/forum, and not through arbitration
WHO
DECIDES NON-ARBITRABILITY?
Issue of
non-arbitrability can be raised at three
stages
First, before the court on an application for reference under Section 11 or for stay of pending judicial
proceedings and reference under 64 Section 8 of the Arbitration Act;
secondly, before the arbitral tribunal
during the course of the arbitration proceedings; or
thirdly, before the court
at the stage of the challenge to the award or its
enforcement.
Therefore, the question – ‘Who decides
nonarbitrability?’ and, in particular, the jurisdiction of the court at the
first look stage, that is, the referral stage
A jurisdictional question is a technical legal
issue, and requires clarity when applied to facts to avoid
bootstrapping and confusion. The doubt as to who has the jurisdiction to decide
could hinder, stray, and delay a many arbitration proceedings. Unfortunately, who decides
non-arbitrability remains a vexed question that does not have a straightforward
universal answer as would be apparent from opinions in the at-variance
Indian case laws on this subject. To some extent, the answer depends on how
much jurisdiction the enactment gives to the arbitrator to decide their own
jurisdiction as well as the court’s jurisdiction at the reference stage and in
the post-award proceedings. It also depends upon the jurisdiction bestowed by
the enactment, viz. the facet of non-arbitrability in question, the scope of
the arbitration agreement and authority conferred on the arbitrator
The legal position as to who decides the question of
nonarbitrability under the Arbitration Act can be divided into four phases.
The first phase was from
the enforcement of the Arbitration Act till the decision of the Constitution
Bench of seven Judges in Patel Engineering Ltd. on 26th October 2005. For
nearly ten years, the ratio expressed in Konkan Railway Corpn. Ltd. and Others
v. Mehul Construction Co., affirmed by
the Constitution Bench of five Judges in Konkan Railway Construction Ltd. and
Another v. Rani Construction Pvt. Ltd.,
had prevailed.
The second phase
commenced with the decision in Patel Engineering Ltd. till the legislative
amendments, which were made to substantially reduce court interference and
overrule the legal effect of Patel Engineering Ltd. vide Act 3 of 2016 with
retrospective effect from 23rd October 2015.
The third phase commenced
with effect from 23rd October 2015 and continued till the enactment of Act 33
of 2019 with effect from 9th August 2019, from where commenced the
fourth phase, with a
clear intent to promote institutionalized arbitration rather than ad hoc
arbitration. The amendments introduced by Act 33 of 2019 have been partially
implemented and enforced. In the present case, we are primarily concerned with
the legal position in the third phase with effect from 23rd October 2015 when
amendments by Act 3 of 2016 became operative
Sections 8 and 11 of the Arbitration Act are
complimentary in nature and the
Court, while exercising powers under the two Sections on whether the matter
should be referred to arbitration,
enjoys equal powers, otherwise, it would lead to an anomalous situation in that
a judicial authority has wider power under Section 8 but lesser power of
examination under Section 11.
whether the word ‘existence’
would include weeding-out arbitration clauses in agreements which indicate that
the subject matter is incapable of arbitration.
In Mayavati Trading Private
Limited v. Pradyuat Deb Burman, 50 a three Judge Bench has held that the legislature by inserting subsection
(6-A) to Section 11 and making amendments to Section 8 by Act 3 of 2016 has
legislatively introduced a new regime so as to dilute and legislatively
overrule the effect and ratio of the judgment of this Court in Patel
Engineering Ltd.
Dr. D.Y. Chandrachud, J. in A.
Ayyasamy observed that Section 8 of
the Arbitration Act has made a departure from Article 8 of UNCITRAL Model Law
as the former uses the expression ‘judicial authority’ rather than court and
the words “unless it finds that the
agreement is null and void, inoperative and incapable of being performed”
mentioned in Article 8 do not find place in Section 8.
Section 16 empowers the arbitral
tribunal to rule upon its own jurisdiction, including the ruling with respect
to the existence or validity of the arbitration agreement.
In Garware Wall Ropes Limited v.
Coastal Marine Constructions and Engineering Limited, 54 the question related
to the effect of an arbitration clause contained in the master contract which
was required to be stamped. The second part of Section 7(2) was applicable. The
issue was whether the judge hearing the Section 11 application should impound
the main contract and ensure that duty and penalty, if any, are paid or in view
of sub-section (6-A) to Section 11 this issue should be examined and decided by
the arbitrator. The argument drawing distinction between validity and existence was raised before
the Court (see paragraph 5 which records the contention) but was rejected for
several reasons, including the reasoning given in Patel Engineering
Ltd., to hold that it is difficult to accede to the argument that Section 16 of
the Arbitration Act makes it clear that an arbitration agreement has an
independent existence of its own. Secondly, on the connect between existence
and validity of an arbitration agreement.
On the question of ‘existence’ and
‘validity’, the Bench held: “29. This judgment in Hyundai Engg.
case is important in that what was specifically under consideration was an
arbitration clause which would get activated only if an insurer admits or
accepts liability. Since on facts it was found that the insurer repudiated the
claim, though an arbitration clause did “exist”, so to speak, in the policy, it
would not exist in law, as was held in that judgment, when one important fact
is introduced, namely, that the insurer has not admitted or accepted liability.
Likewise, in the facts of the present case, it is clear that the arbitration
clause that is contained in the sub-contract would not “exist” as a matter of
law until the sub-contract is duly stamped, as has been held by us above. The argument 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
INTERNATIONAL
PROSPECTIVE
Stavros Brekoulakis in his paper titled On Arbitrability:
Persisting Misconceptions and New Areas of Concern accepts that as per
prevailing view in-arbitrability of the subject matter of the arbitration
agreement renders the arbitration agreement invalid. However, he argues that
in-arbitrability of the subject matter is an issue concerning jurisdiction of
arbitral tribunal rather than the validity of the arbitration agreement.
Referring to Article V(1)(a) and Article V(2)(a) of the New York Convention, he
draws a distinction between in-arbitrability and invalidity. Arbitration agreements
are sui generis contracts with both contractual and jurisdictional features.
The latter is wider in scope. The courts at the referral stage may
review only whatever is related to the formation of the arbitration agreement
as a substantive contract, that is, contractual aspects
of the arbitration agreement and
jurisdictional aspects of the arbitration agreement should be left to the
arbitral tribunal. In other words, at the stage of referral,
the courts may review only whatever is related to the formation of the
arbitration agreement (the contractual aspects of the arbitration agreement)
and the issues relating to the jurisdictional aspects of the arbitration
agreement, which as per the author includes the question relating to
non-arbitrability of the claims, should be under the exclusive jurisdiction of
the arbitral tribunals. Thus,
distinction is drawn between validity in terms of substantive and formal
validity of an arbitration agreement as contractual aspects; and whether a
claim is non-arbitrable. The latter question would be arbitrable and not for the
courts to decide at the referral stage. However, on referring to
Articles II(1) and II(3) of the New York Convention the author did observe that
it seems to include arbitrability of subject matter within the essential
meaning of an arbitration agreement.
Emmanuel Gaillard and Yas Banifatemi in Negative Effect of
Competence-Competence: On the question of courts’ interference at the
reference stage in terms of Article II(3) of the New York Convention, they are
of the opinion that there is no indication provided as to the standard that
should be applied for such determination, that is, whether the courts are
required to conduct in-depth investigation into the merits of the existence and
validity of the arbitration agreement and issue a final decision on the
question, or the court should restrict itself to prima facie verification that
the arbitration agreement exists and is valid, and reserve its full review
until the time when there is an action to enforce or set aside the arbitral
award. The question, in effect, is one of timing and to the extent the courts
are entitled to review the existence and validity of the arbitration agreement.
The answer, they observe, is found in the notion of competence-competence, one
of the founding principles of the international arbitration law that provides
the arbitrators with power to rule on their own jurisdiction and embodies the
mirroring effect that the court should refrain from engaging in examination of
the arbitrator’s jurisdiction before the arbitrators themselves have an
opportunity to do so. This, they 105 state, by no means suggests that the
domestic courts relinquish their power to review the existence and validity of
an arbitration agreement which is first left to the arbitrators to rule. The
courts enjoy the power of scrutiny after the award is rendered. They have
referred to decisions of the higher courts of Switzerland, England, France,
Canada and India (Shin-Etsu Chemical Co. Ltd.) to observe that the court’s review
at the first stage is limited to prima facie verification of existence and
validity of the arbitration clause without the question being analysed in
detail which the tribunal is empowered to decide when necessary. At the
reference stage, the court shall decline jurisdiction if the summary
examination of the arbitration agreement does not allow it to find that the
agreement is null and void, inoperative and incapable of being performed
John J. Barcelo III, in his paper titled ‘Who Decides the
Arbitrator’s Jurisdiction? Separability and Competence-Competence in
Transnational Perspective’, observes that the greater the number of
issues required to be fully adjudicated at Stage I, the greater is the
potential for disruption of the arbitration process by an obstructing party
even in case of a genuine agreement to arbitration. An extremely
pro-arbitration approach with no or minimal judicial scrutiny might send all
the questions to the arbitrators. At the same time arbitration is no holy grail
and not all parties resisting arbitration are obstructionists. A party must
have its say in the court, unless he has agreed to arbitrate
The French approach, as the paper notes, is that if an
arbitral tribunal is already seized of the matter, the court will refuse
jurisdiction and leave questions as to existence, validity and scope of the
arbitration agreement to the arbitrators. However, if the arbitral tribunal is not
yet seized of the matter, the court will undertake a limited scrutiny of the
challenge and will retain jurisdiction only if the arbitration agreement is
manifestly null.
The
German Law of Kompetenz-Kompetenz prior to the new 1998 German Arbitration
Act was relatively unique, or arguably so, as some commentaries maintain that
when express power to decide their jurisdiction is conferred on the arbitrator,
then it would exclude judicial scrutiny at state 1 and stage 3. However, the
1998 109 German Arbitration Act based upon UNCITRAL Model Law, states that the
court may only decide the arbitrator’s jurisdiction if requested to do so
before the arbitral tribunal is constituted. The German Law expostulates preference for the arbitrator to decide
the jurisdiction in an interim award. Referring to the UNCITRAL Model
Law, reference is made to the
competence-competence as spelled in Article 8(1) which directly deals
with judicial review at Stage I,
which is limited to the existence of a valid arbitration agreement. It
postulates that the parties shall be referred to arbitration, unless the
court finds that the agreement is null and void, inoperative or incapable of
being performed. This, the author
feels, could be read as authorizing full judicial determination and settlement
of arbitration agreement’s existence and validity. Article 16 (1) embodies the positive
competence-competence concept and Articles 16(3) and 8(2) enact a partial
negative competencecompetence principle. The latter allows
arbitration proceedings to go forward despite the court consideration of the
arbitrator’s jurisdiction. Article
16(3) encourages outcome by expressly empowering arbitrators to rule over their
jurisdiction as a preliminary question. The British Arbitration Act of
1996 based on the Model Law requires the court to stay the legal proceedings,
110 ‘unless satisfied’ that the arbitration agreement is null and void,
inoperative or incapable of being performed. “Unless satisfied”, the author observes, is
closer to “unless it is manifest”, rather
than it is to the Model Law terminology “unless it finds”. The British Act
allows the arbitrator to render his/her decision on jurisdiction either in the
preliminary award or in the final award, but allows the parties to insist the
arbitrators for preliminary and an early decision as a check against wasteful
proceedings. The paper also deals with the American
approach in domestic and international arbitration. In domestic law the issues
of arbitrability have been divided into procedural and substantial objections.
Procedural arbitrability issues
include whether a time limit for bringing a claim has been observed or whether
a party has waived its right to arbitrate and also issues like waiver or
estoppel thereby denying a party from claiming the right or any pre-condition
for invoking arbitration has not been made, etc. These issues are ‘gateway
questions’ that are presumptively for the arbitrator to decide and not
for the courts to decide, at least at the first stage. The substantive aspects are those wherein the court at the first
stage would go into prima facie examination. Substantive issues
pertaining to the validity and First
Options of existence of the arbitration agreement (Legal position in domestic
law post- Buckeye Check Cashing Inc. is explained below.) He observes that the
United States Supreme Court has frequently been more receptive to international
as opposed to domestic agreements. An important consideration being that
international agreements are commercial and involve sophisticated, generally
well-advised parties and there is a need for uniformity of interpretation under
the New York Convention
Prof. Alan Scott Rau65 questions the “abstract distinction between
‘invalidity and nonexistence” as “nothing”. The author while supporting
the principle of separability rejects the argument that formation of a contract
is different from enforcement of the contract as when the agreement is invalid there is no
agreement to anything.
INDIAN
APPROACH
Principles of competence-competence have positive
and negative connotations. As a positive implication, the
arbitral tribunals are declared competent and authorised by law to rule as to
their jurisdiction and decide non-arbitrability questions. In case of expressed negative effect, the statute would govern and
should be followed. Implied negative
effect curtails and constrains interference by the court at the referral
stage by necessary implication in order to allow the arbitral tribunal to rule
as to their jurisdiction and decide non-arbitrability questions. As per the negative effect, courts at the
referral stage are not to decide on merits, except when permitted by the
legislation either expressly or by necessary implication, such questions of
non-arbitrability. Such prioritisation of arbitral tribunal over the courts can
be partial and limited when
the legislation provides for some or restricted scrutiny at the ‘first look’
referral stage.
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.
Section 8 prescribes the courts to refer the parties to arbitration, if the
action brought is the subject of an arbitration agreement, unless it finds that
prima facie no valid arbitration agreement exists. 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
valid arbitration agreement. Prima facie case means that the assertions on
these aspects are bona fide. When
read with the principles of separation and competence-competence and Section 34
of the Arbitration Act, referral court without getting
bogged-down would compel the parties to abide unless there are good and
substantial reasons to the contrary.
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. This necessarily reflects on the nature of the jurisdiction
exercised by the court.
The nature and facet of
non-arbitrability could also determine the level and nature of scrutiny by the
court at the referral stage. Stravos Brekoulakis has differentiated between
contractual aspects of arbitration agreement which the court can examine at
referral stage and jurisdictional aspects of arbitration agreement which he
feels should be left to the arbitral tribunal.
John J. Barcelo III, referring to some American decisions had
divided the issue of non-arbitrability into procedural and substantive
objections. The procedurals are ‘gateway questions’ which would
presumptively be for the arbitrator to decide at least at the first stage. In the Indian context, we would
respectfully adopt the three categories in
Boghara Polyfab Private Limited. The first category of issues, namely, whether the party has approached
the appropriate High Court, whether there is an arbitration agreement and
whether the party who has applied for reference is party to such agreement
would be subject to more thorough examination in comparison to the second and
third categories/issues which are presumptively, save in exceptional cases, for
the arbitrator to decide. In the
first category, we would add and include the question or issue relating to whether the cause of action relates to action in personam or
rem; whether the subject matter of the dispute affects third party rights,
have erga omnes effect, requires
centralized adjudication; whether the subject
matter relates to inalienable sovereign and public interest functions of the
State; and whether the subject matter of dispute is expressly or by necessary implication non-arbitrable as per mandatory statue(s).
Such questions arise rarely and, when
they arise, are on most occasions questions of law. On the other hand, issues relating to contract
formation, existence, validity and non-arbitrability would be connected
and intertwined with the issues underlying the merits of the respective
disputes/claims. They would be factual and disputed and for the arbitral tribunal to decide. The legal order needs a right balance between avoiding
arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the
matter is clearly non-arbitrable.
CONCLUSION-I
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.
(ii) The court at the reference
stage exercises judicial powers. ‘Examination’, as an ordinary expression in
common parlance, refers to an act of looking or considering something carefully
in order to discover something (as per Cambridge Dictionary). It requires the
person to inspect closely, to test the condition of, or to inquire into
carefully (as per MerriamWebster Dictionary). It would be rather odd for the
court to hold and say that the arbitration agreement exists, though ex facie
and manifestly the arbitration agreement is invalid in law and the dispute in
question is non-arbitrable. The court is not powerless and would not act beyond
jurisdiction, if it rejects an application for reference, when the arbitration
clause is admittedly or without doubt is with a minor, lunatic or the only
claim seeks a probate of a Will.
(iii) Most scholars and jurists accept and
agree that the existence
and validity of an arbitration agreement are the same. Even Starvos
Brekoulakis accepts that validity, in terms of substantive and formal validity,
are questions of contract and hence for the court to examine.
(iv) Most jurisdictions accept and require prima facie review
by the court on non-arbitrability aspects at the referral stage.
(v) Sections 8 and 11 of the Arbitration Act are
complementary provisions as was held
in Patel Engineering Ltd.. The object and purpose behind the two provisions is
identical to compel and force parties to abide by their contractual
understanding. This being so, the two provisions should be read as laying down
similar standard and not as laying down different and separate parameters. Section 11 does not
prescribe any standard of judicial review by the court for determining whether
an arbitration agreement is in existence. Section 8 states that the
judicial review at the stage of reference is prima facie and not final. Prima
facie standard equally applies when the power of judicial review is exercised
by the court under Section 11 of the Arbitration Act. Therefore, we can read the mandate of valid
arbitration agreement in Section 8 into mandate of Section 11, that is, ‘existence
of an arbitration agreement’.
(vi) Exercise of power of prima facie judicial
review of existence as including validity is justified as a court is the first forum that examines and decides the request
for the referral. Absolute “hands off” approach would be
counterproductive and harm arbitration, as an alternative dispute resolution
mechanism. Limited, yet effective intervention is acceptable as it does not
obstruct but effectuates arbitration.
(vii) Exercise of the limited prima facie review does
not in any way interfere with the principle of competence– competence and separation as to obstruct arbitration proceedings
but ensures that vexatious and frivolous matters get over at the initial stage.
(viii) 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
What is true and applicable for men of commerce
and business may not be equally true and apply in case of laymen and to those who are not fully aware of the effect
of an arbitration clause or had little option but to sign on the standard form
contract.
Broad or narrow interpretations
of an arbitration agreement can, to a great extent, effect coverage of a
retroactive arbitration agreement. Pro-arbitration broad interpretation, normally
applied to international instruments, and commercial transactions is based upon
the approach that the arbitration clause should be considered as per the true
contractual language and what it says, but in case of doubt as to whether
related or close disputes in the course of parties’ business relationship is
covered by the clause, the assumption is that such disputes are encompassed by
the agreement. The
restrictive interpretation approach on the other hand states that in
case of doubt the disputes shall not be treated as covered by the clause.
Narrow approach is based on the reason that the arbitration should be viewed as
an exception to the court or judicial system. The third approach is to avoid either broad or restrictive
interpretation and instead the intention of the parties as to scope of
the clause is understood by considering the strict language and circumstance of
the case in hand. Terms like ‘all’, ‘any’, ‘in respect of’, ‘arising out of’ etc. can expand the scope and ambit of
the arbitration clause
Which approach as to interpretation of an
arbitration agreement should be adopted in a particular case would depend upon
various factors including the
language, the parties, nature of relationship, the factual background in which
the arbitration agreement was entered, etc. In case of pure commercial
disputes, more appropriate principle of interpretation would be the one of
liberal construction as there is a presumption in favour of one-stop
adjudication.
‘WHO
DECIDES ARBITRABILITY?’
(a) Ratio of the decision in
Patel Engineering Ltd. on the scope of judicial review by the court while
deciding an application under Sections 8 or 11 of the Arbitration Act, post the
amendments by Act 3 of 2016 (with retrospective effect from 23.10.2015) and
even post the amendments vide Act 33 of 2019 (with effect from 09.08.2019), is
no longer applicable.
(b) Scope of judicial review and jurisdiction of the court under Section 8 and 11 of the
Arbitration Act is identical but extremely limited and restricted.
(c) The general rule and
principle, in view of the legislative mandate clear from Act 3 of 2016 and Act
33 of 2019, and the principle of severability and competence-competence, is that
the arbitral tribunal is the preferred first authority to determine
and decide all questions of non-arbitrability. The court has been conferred power of “second
look” on aspects of nonarbitrability post
the award in terms of sub-clauses (i), 149 (ii) or (iv) of Section 34(2)(a) or
sub-clause (i) of Section 34(2)(b) of the Arbitration Act.
(d) Rarely as a demurrer the court may interfere at the Section 8
or 11 stage when it is manifestly and ex facie certain that the arbitration
agreement is nonexistent, invalid or the disputes are non-arbitrable, though
the nature and facet of non-arbitrability would, to some extent, determine the
level and nature of judicial scrutiny. The restricted and limited
review is to check and protect parties from being forced to arbitrate when the
matter is demonstrably ‘non-arbitrable’ and to cut off the deadwood. The court
by default would refer the matter when contentions relating to
non-arbitrability are plainly arguable; when consideration in summary
proceedings would be insufficient and inconclusive; when facts are contested;
when the party opposing arbitration adopts delaying tactics or impairs conduct
of arbitration proceedings. This is not the stage for the court to enter into a mini
trial or elaborate review so as to
usurp the jurisdiction of the arbitral tribunal but to affirm and uphold integrity and efficacy of
arbitration as an alternative dispute resolution mechanism
TheStatutory language ofSection 8 and 11 are different, however materially they donot
vary and both Sections provide for
limited judicial interference at reference stage
CONCLUSION-
II
I.
Sections 8 and 11 of the Act have the
same ambit with
respect to judicial interference.
II.
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.
III.
The Court, under Sections 8 and 11,
has to refer a matter to arbitration or to appoint an arbitrator, as the case may be, 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.
IV.
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’.
V.
The
scope of the Court to examine the prima
facie validity of an arbitration agreement includes only:
a. Whether the
arbitration agreement was in writing?
b. Whether the
arbitration agreement was contained in exchange of letters, telecommunication
etc?
c. Whether the core contractual
ingredients qua the arbitration agreement were fulfilled?
d. On rare occasions,
whether the subjectmatter of dispute is arbitrable?
Comments
Post a Comment