[This article is authored by Gursehaj Singh, a penultimate year law student at JGLS, Sonipat.]
Keywords: Existence of Arbitration Agreement, Arbitration and Reconciliation Amendment (Bill), 2018, Section 11(6A).
Prior to the 2015 Amendment, the Indian Courts had extensive authority when they appointed an arbitrator under Section 11 of the Arbitration and Conciliation Act 1996 (hereinafter ‘The Act’). The Courts had the power to determine the existence, duration and validity of an arbitration agreement between two parties.
The 246th Law Commission Report recommended the insertion of Section 11(6A), with an explanation, which stated that the Court must refer the parties to arbitration when it is prima facie established that an arbitration agreement exists, thereby leaving the final determination of validity of the agreement to the arbitrator. If the Court concludes that an arbitration agreement does not exist, then the conclusion will be final and not prima facie. This was done keeping in mind the judicial discourse in the cases of S.B.P. Co. v. Patel Engineering Ltd. and Anr, and National Insurance Co. Ltd. v. M/s Boghara Polyfab Pvt. Ltd.
In the Patel Engineering case, the Court held that the appointment of an arbitrator by the Chief Justice or his designate under Section 11 is a judicial function and not an administrative one. Thus, the Chief Justice/his designate will have the power to examine the preliminary issues relating to the existence and validity of the arbitration agreement. In the Boghara case, the Court affirmed the decision of the Court in the Patel Engineering case. The Court categorized the issues that may arise for determination in a petition under Section 11 of the Act.
The issues in the first category are to be decided by the Chief Justice or his designate. These are: (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 under section 11 of the Act, is a party to such an agreement.
The issues in Category II are to be decided by the Chief Justice/his designate or may be left to the decision of the arbitral tribunal. These are: (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.
The issues in Category III should be left exclusively to the decision of the arbitral tribunal. These are: (a) whether a claim made falls within the arbitration clause, (b) merits or any claim involved in the arbitration.
Both these cases led the Supreme Court in deciding the preliminary issues, which were unrelated to the existence of an arbitration agreement. In other words, the scope of enquiry under section 11 was broadened. Consequently, Section 11(6A) was inserted in the Act via the 2015 amendment with the sole purpose to limit the powers that the Court could exercise in the appointment of arbitrators.
Dissecting the Provision
Section 11(6A) states: “(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.”
According to the said provision, the Court, while entertaining an application for the appointment of an arbitrator under Section 11, has to determine the ‘existence’ of an arbitration agreement only and nothing else. In other words, the Court cannot decide upon issues such as the validity or duration of the arbitration agreement. This power has been expressly intended to rest with the Arbitration Tribunal. Sub-sections (4), (5), (6) of Section 11 primarily talk about situations where the parties to an arbitration agreement are unable to appoint an arbitrator(s) within the 30-days of arbitration notice, or where the parties are unable to follow the procedure for appointing an arbitrator so agreed between them. In such a situation, to bring effect to a valid arbitration clause, one of the parties may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the appointment procedure forward. Section 11(6A) states that the provision has to be applied “notwithstanding any judgment, decree or order of any Court”. This shows a clear intent of the Legislature to expressly address and adjust the interpretation given by the Supreme Court of India in the Patel Engineering case.
However, recent developments have nullified the effect of this provision. Even after the 2015 Amendment, the courts, in recent cases, have parted from the very spirit of Section 11(6A). These cases are United India Insurance Co. Ltd. and Ors. v. Hyundai Engineering and Construction Co. Ltd. and Ors, and Garware Wall Ropes v. Coastal Marine Constructions & Engineering Ltd.
Analysis of the Recent Judicial Discourse
In the United India Insurance case, the Respondent was awarded a contract for the design, construction and maintenance of a bridge. The Respondent obtained an insurance policy from the Appellant and the arbitration clause in the policy stipulated that any dispute between the parties shall not be referred to arbitration if the insurance company has not accepted liability under or in respect of the policy. During the construction of the bridge, a fatal accident occurred and resulted in losses to the contractor. Consequently, a dispute arose between the two parties and the Respondent invoked the arbitration clause from the policy. The issue in the present case was whether the dispute could be referred to arbitration since the insurance company had not accepted liability for the accident. The Supreme Court relied upon its observation in the Oriental Insurance case, where it observed that the arbitration clause could carve out exceptions to exclude the applicability of the arbitration clause. Thus, it was held that the arbitration clause in the insurance policy was “ineffective and incapable of being enforced, if not non-existent”. In other words, the dispute was non-arbitrable even though the arbitration agreement existed.
In the Garware case, a dispute arose out of a sub-contract between both parties following which the Appellant terminated the contract. The issue was whether the Court could appoint an arbitrator pursuant to an arbitration clause arising out of an unstamped agreement. The Supreme Court interpreted the difference between the ‘existence’ and ‘validity’ of an arbitration agreement and observed that an arbitration clause cannot be bifurcated entirely from the agreement it is contained in. The Stamp Act applies to the whole agreement and thus, it was held that the arbitration clause does not exist as the agreement is unenforceable in law.
It is well known that the interpretation of a provision needs to be construed from the intention of the legislator. In both of the above cases, the Supreme Court ignored the intent behind inserting Section 11(6A) i.e. to limit judicial intervention when appointing an arbitrator under Section 11 of the Act. In the Garware case, the courts have given the widest meaning possible to ‘existence’ as stated in Section 11(6A) and have included within it the issue of whether the agreement is duly stamped or not. The Supreme Court relied upon the principle of harmonious construction and balanced the provisions of the Arbitration Act and the Maharashtra Stamp Act. Thus, in both cases, even though the arbitration clause was in existence, it was not capable of being enforced due to non-fulfilment of a pre-condition or the agreement not being duly stamped.
The 2018 Amendment Bill has proposed the repealment of Section 11(6A) of the Act. Due to this, the courts will not have the power to determine the existence of an arbitration agreement. The power to appoint arbitrators under Section 11 will rest with the arbitral institutions. These institutions will be recognized by the Arbitration Council of India (ACI), which the Bill proposes to create. The 2018 Amendment strives to appreciate the principle of kompetenz-kompetenz, according to which, the arbitral tribunal should decide questions as to its own jurisdiction in a matter. This principle is well established in international arbitration and thus, the amendment will ensure compliance with the international best practices. It can be said that the story behind this provision is approaching its end.