Evolving Dimensions: Unraveling the Changing Landscape of Court’s Powers in Arbitrator Appointments under Section 11

Article by Abhishree Manikantan

Modeled after the UNCITRAL Model Code, the Arbitration & Conciliation Act, 1996 (“the Act”), has been updated, among other times, in 2015, 2019 and 2021 to underscore the significance of prompt dispute settlement. Minimizing judicial interference with the arbitration process is one of the Act’s core principles.[1] Nevertheless, in the process of “clarifying” the Act, different courts have construed these clauses in different ways, creating contradictory precedents and necessitating a merit-based review of each case.

Appointment through a Judicial Lens – Prima Facie Approach vs. Expanding Horizons

Unquestionably, there are situations where the court’s supervisory jurisdiction is necessary. Appointment of arbitrators under Section 11 of the Act is one such circumstance. The Amendment of 2015 inserted Section 11(6A) which required the competent court acting under Section 11 to confine its examination to “the existence of an arbitration agreement”. The Supreme Court in Duro Felgura[2] echoed this sentiment and accordingly propounded this “prima facie approach”.

Despite this, the Supreme Court soon thereafter passed divergent judgments in Oriental Insurance Company[3] and United India Insurance,[4] wherein the court began examining the arbitrability of claims. In Antique Art Exports,[5] the court went a step further and entered the merits of the dispute to find that “…no supportive prima facie evidence being placed on record in absence thereof, it must follow that the claim had been settled with accord and satisfaction leaving no arbitral dispute subsisting under the agreement to be referred to the arbitrator for adjudication.” This enlargement of scope continued with the Supreme Court’s decision in the first Vidya Drolia,[6] wherein it was observed that the “validity” of an arbitration agreement is distinct from its “existence”.

For a time thereafter, the debate was settled by the decision of a three-judge bench of the Supreme Court in Mayavati Trading,[7] which reverted the court’s ambit of powers to merely concluding the existing of an arbitration agreement. However, just a year later another three-judge bench concluded that it was empowered under Section 11 to conduct a prima facie review to “cut the deadwood and trim off the side branches in straightforward cases where dismissal is barefaced and pellucid”. Accordingly, the court in the second Vidya Drolia[8] held that at this stage it could examine:

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?

As expected, the floodgates were once again opened and in DLF Home Developers it was held that courts must “apply their mind to the core preliminary issues, albeit, within the framework of Section 11(6-A) of the Act.”[9] In Indian Oil Corpn., the Apex Court “specifically observed and held that aspects with regard to “accord and satisfaction” of the claims can be considered by the Court at the stage of deciding Section 11(6) application”.[10] The Supreme Court exercising powers under Section 11(6) also remitted a matter back to Hugh Court for a “preliminary inquiry”.[11]

Cutting to the Chase – Kompetenz-Kompetenz in 2023

In light of the above decisions, the Supreme Court most recently further expanded the scope of review under Section 11 in SPML Infra[12] expounding the “eye of the needle” scrutiny test. Two inquiries are to be undertaken at this referral stage: primary and secondary. A comprehensive investigation by the referral court is necessary for the primary inquiry, which concerns “the existence and validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant’s privity to the said agreement.” The dispute’s non-arbitrability is the subject of the secondary investigation, which has been constrained to a prima facie review. The redeeming feature of this decision is the Supreme Court’s observation that the arbitral tribunal “is the preferred first authority to determine and decide all questions of non-arbitrability,” and that only where claims are “manifestly and ex – facie non – arbitrable” would the court reject reference.

Furthermore, while it has been noted that “courts must not undertake a full review of the contested facts: they must be only confined to a primary first review” and that the Court’s endeavor must be to let “facts speak for themselves”, they are still required “to examine whether the assertion on arbitrability is bona fide or not”.

It is evident from the language of the decision that an attempt has been made to preserve the principle of kompetenz-kompetenz and the legislative policy of minimizing judicial interference in arbitral processes. However, it is undeniable that the direct ramification of the judgment has been, yet again, an enlargement of the scope of court interference at pre-reference stages. In fact, the Supreme Court in Magic Eye[13] took note of the decision in SPML Infra[14] and went on to hold that the existence and legality of an arbitration agreement are fundamental issues that the court must resolve “conclusively and finally and should not leave the said issue to be determined by the arbitral tribunal.” Hence, there is again a requirement for the issue to be clarified.

Conclusion

In navigating the evolution of court powers under Section 11, the judiciary has grappled with balancing party autonomy and efficient dispute resolution. The “eye of the needle” test, while attempting to preserve kompetenz-kompetenz, inadvertently expands court scrutiny. Striking a delicate balance between judicial intervention and arbitration efficiency remains an ongoing challenge, necessitating a nuanced approach to uphold the principles of the Arbitration and Conciliation Act, 1996.

[1] Section 5, Arbitration & Conciliation Act, 1996; Associate Builders v. DDA, (2015) 3 SCC 49.

[2] Duro Felgura, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729.

[3] Oriental Insurance Company Ltd. v. Narbheram Power and Steel Pvt. Ltd., (2018) 6 SCC 534.

[4] United India Insurance Company Ltd. and Anr. v. Hyundai Engineering and Construction Co. Ltd. and Ors., (2018) 17 SCC 607

[5] United India Insurance Co. Ltd. v. Antique Art Exports (P) Ltd., (2019) 5 SCC 362.

[6] Vidya Drolia and Ors. v. Durga Trading Corpn., (2019) 20 SCC 406.

[7] Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714.

[8] Vidya Drolia & Ors. v. Durga Trading Corpn., (2021) 2 SCC 1 at Para 237.

[9] DLF Home Developers Ltd. v. Rajapura Homes (P) Ltd., (2021) 16 SCC 743 at Para 24.

[10] Indian Oil Corpn. Ltd. v. NCC Ltd., (2023) 2 SCC 539 at Para 91.

[11] Emaar India Ltd. v. Tarun Aggarwal Projects LLP & Anr., (2022) SCC Online SC 1328.

[12] NTPC v. SPML Infra, (2023) SCC Online SC 389.

[13] Magic Eye Developers (P) Ltd. v. Green Edge Infrastructure (P) Ltd., (2023) 8 SCC 50 at Para 12.

[14] Supra, note 12.