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The Ring Fencing of Judicial intervention in Arbitration Proceedings

Article by Saima Mahmood

The equilibrium in party autonomy and judicial intervention

The Arbitration and Conciliation Act, 1996 (referred as ‘Arbitration Act’) has predicated on the principle of “party autonomy”, “settlement of disputes” with “minimal judicial intervention” during an arbitration proceeding. The Courts have time again made multiple attempts to dilate the judicial intervention in arbitration matters and the classic example of the same is Section 11 of the Arbitration Act i.e., Appointment of Arbitrators. Section 11 of the Arbitration Act clearly demarcates the scope of judicial intervention only when there is a deadlock or a failure of the parties to follow the appointment procedure. In a sense it can be said that Section 11 of Arbitration Act intents to give effect to the mutual intention of the parties to settle their dispute by arbitration in situations where the partes fail to appoint an arbitrator.

The elasticity of Judicial intervention: 

The intent of the legislature is even more clear from Section 5 of the Arbitration Act which envisages minimum supervisory role of courts in the arbitral process, and only to the extent “so provided” under the Part I of Arbitration Act[1]. Thus, it can be said that Section 5 is the general rule of judicial non-interference, and all provisions of the Arbitration Act shall be construed in consonance with Section 5.

Striking the right balance between the interposition and intercession of judicial scope is the key to the successful execution of the intent of Arbitration Act. The elasticity of judicial intervention is so immense that it is capable of enlarging its ambit in every statute and legislation with the attempt to ‘iron out the crease’ to the ambiguity to such extent that the intent and the interpretation both go haywire. Hence it becomes vital that the true intent of any statute is safeguarded by striking the right balance in elasticity of judicial intervention.

Selective Judicial Intervention.

In the latest 7 judge bench judgment i.e In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899[2], the Court yet again has dealt with the ever-shifting paradigm of the scope of judicial intervention and further examined Section 11 of the Arbitration Act in terms of judicial scope. This article attempts to deal with the scope of judicial intervention in Section 11 of Arbitration act.

Position prior to In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899[3]

Before, the 7 judge bench[4] has dealt in detail the judicial precedence of Section 11 in order to examine its scope and effect. Starting from SPB & Co. v. Patel Engineering Ltd.[5] , a seven-Judge Bench of Apex Court which observed that Sections 8 and 11 are complementary in nature. Consequently, it was held that the judicial authority at the referral stage under Section 11(6) had the right to determine all preliminary issues.

Subsequently, the extent of judicial interference at the referral stage was scrutinised by Apex Court in National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd.[6] which further enhanced the ambit of judicial interference at pre-arbitral stage leading to courts conducting  mini-trials instead of summarily dealing with the preliminary issues.

Significantly, the Law Commission observed this and accordingly, Section 11(6) was inserted and the nature of preliminary examination at the referral stage under Section 11 was confined to the existence of an arbitration agreement.

The effect and impact of the 2015 Amendment Act[7] was subsequently clarified in Duro Felguera, S.A. v. Gangavaram Port Ltd.[8]. and further held that Section 11(6A) incorporates the principle of minimal judicial intervention.

In Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman[9], a three-Judge Bench of this Court affirmed the reasoning in Duro Felguera, S.A. v. Gangavaram Port Ltd.[10] by observing that the examination under Section 11(6A) is “confined to the examination of the existence of an arbitration agreement and is to be understood in the narrow sense.” Moreover, it was held that the position of law prior to the 2015 Amendment Act, as set forth by the decisions of this Court in Patel Engineering (supra) and Boghara Polyfab (supra), has been legislatively overruled.

Subsequently, a three-bench judge in Vidya Drolia v. Durga Trading Corpn.[11], held that an arbitration agreement would not exist if does not satisfy the mandatory legal requirements for it to be enforceable which includes a stamp duty. Later a three-judge Bench of the Supreme Court, in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited[12]  doubted this position and observed that since arbitration agreement is an independent agreement, it cannot be invalidated merely on insufficiently stamped main contract.

This issue was referred to a larger bench to render the verdict of this issue. A five Judge decided in N.N. Global Mercantile Private Limited v M/s Indo Unique Flame Ltd. & Ors.[13] by a 3:2 majority that Court acting under Section 11 of the Arbitration Act cannot disregard the mandate of Section 33 & 35 of Stamp Act[14]. and further the “existence” of an arbitration agreement contemplated under Section 11(6A) of the Arbitration Act is not merely a facial existence or existence in fact, but also “existence in law.  Finally, a Seven Judge Bench was called upon to resolve the question.

Scope of Section 11(6A) and Section 16 of Arbitration Act – the Tussle of Referral Court vs Arbitral Tribunal:

The Seven Judge Bench[15] observed that Section 11(6A) uses the expression “examination of the existence of an arbitration agreement.” The selective use of the word “examination” clarifies the legislative intent is to restrict the judicial intervention at the stage of appointment of arbitrator of the legislature to merely inspect or scrutinize the dealings between the parties for the existence of an arbitration agreement. It makes it clear that the expression “examination” does not connote or imply a laborious or contested inquiry, hence the scope of determination of preliminary issues by referral court under Section 11(6A) goes away.

On the other hand, the Seven Judge Bench[16] analyzed Section 16 of the Arbitration Act which provides that the arbitral tribunal can “rule” on its jurisdiction, including the existence and validity of an arbitration agreement. A “ruling” connotes adjudication of disputes after admitting evidence from the parties. Therefore, it is evident that the referral court is only required to examine the existence of arbitration agreements, whereas the arbitral tribunal ought to rule on its jurisdiction, including the issues pertaining to the existence and validity of an arbitration agreement.

The Seven Judge Bench[17] validated that it is the arbitral tribunal and not the court which may test whether the requirements of a valid contract and a valid arbitration agreement are met. If the tribunal finds that these conditions are not met, it will decline to hear the dispute any further. If it finds that a valid arbitration agreement exists, it may assess whether the underlying agreement is a valid contract.

Intent behind restrictive judicial intervention

The next question that comes to mind is why such strict constrains to judicial intervention.  The purpose of the Arbitration Act is not just avoiding court but also to deliver relief within reasonable time. If the ambit of judicial intervention is widened, it will give leeway to unnecessary delay.

It was held by the Seven Judge Bench[18] that the purpose of vesting courts with certain powers under Sections 8 and 11 of the Arbitration Act is to facilitate and enable arbitration as well as to ensure that parties comply with arbitration agreements. However, the disputes which have arisen between the parties remain the domain of the arbitral tribunal only subject to the scope of its jurisdiction as defined by the arbitration clause). The exercise of the jurisdiction of the courts of the country over the substantive dispute between the parties is only possible at two stages:

  1. If an application for interim measures is filed under Section 9 of the Arbitration Act; or
  2. If the award is challenged under Section 34.

Once the arbitral tribunal has been appointed, it will act in accordance with law and proceed to impound the agreement under Section 33 of the Stamp Act if it sees fit to do so. It has the authority to receive evidence by consent of the parties, in terms of Section 35[19]. The procedure under Section 35 of the Stamp Act[20] may be followed thereafter. In this manner, the competence-competence doctrine is given life and arbitration proceedings can continue to remain a faster alternative to suits before the trial courts or other, similar actions.

Intent of Arbitration & Conciliation Act, 1996

The Court[21] interpreted that the Statement of Objects and Reasons of the 2015 Amendment Act to observe that it indicates that the Supreme Court or High Court at the stage of the appointment of an arbitrator shall “examine the existence of a prima facie arbitration agreement and no other issues”.

These other issues not only pertain to the validity of the arbitration agreement, but also include any other issues which are a consequence of unnecessary judicial interference in the arbitration proceedings. Accordingly, the “other issues” also include examination and impounding of an unstamped instrument by the referral court at the Section 8 or Section 11 stage. The process of examination, impounding, and dealing with an unstamped instrument under the Stamp Act is not a time-bound process, and therefore does not align with the stated goal of the Arbitration Act to ensure expeditious and time-bound appointment of arbitrators.

Conclusion

Lastly the Court concluded by stating that an objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists; accordingly, any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal; and the decision in N.N. Global Mercantile Private Limited v M/s Indo Unique Flame Ltd. & Ors.[22] and SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd[23] are overruled. Paragraphs 22 and 29 of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd.[24] are overruled to that extent.[25]

The 7-judge bench judgment has given ample clarity to the harmonious intent of Arbitration and Conciliation Act and Stamp Act. The inclination of the 7-Bench judgment is towards the importance of selective judicial intervention. The selection of when & where and, including the magnitude of judicial intervention is required in an arbitration proceeding while keep the essence of Arbitration Act intact. The legislator and the Courts have attempted to keep it as “business-friendly arbitration regime” with party’s autonomy as priority.

[1] Food Corporation of India v. Indian Council of Arbitration, (2003) 6 SCC 564
[2] 2023 SCC Online SC 1666
[3] 2023 SCC Online SC 1666
[4] 2023 SCC Online SC 1666
[5] (2005) 8 SCC 618
[6] (2009) 1 SCC 267
[7] 2015 Amendment Act
[8] (2017) 9 SCC 729
[9] (2019) 8 SCC 714
[10] (2017) 9 SCC 729
[11](2021) 2 SCC 1
[12] (2021) 4 SCC 379
[13] (2023) 7 SCC 1
[14] Indian Stamp Act, 1899
[15] 2023 SCC Online SC 1666
[16] 2023 SCC Online SC 1666
[17] 2023 SCC Online SC 1666
[18] 2023 SCC Online SC 1666
[19] Indian Stamp Act, 1899
[20] Indian Stamp Act, 1899
[21] 2023 SCC Online SC 1666
[22] (2023) 7 SCC 1
[23] (2011) 14 SCC 66
[24] (2019) 9 SCC 209
[25] Para 234, 2023 SCC Online SC 1666
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