PRAVIN ELECTRICALS PVT. LTD. versus GALAXY INFRA AND ENGINEERING PVT. LTD.
[2021] 1 S.C.R. 1162, Supreme Court of India, 2021
Outcome: Case Partly allowed (Granted)
Segment: Ratio
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PRAVIN ELECTRICALS PVT. LTD.
v.
GALAXY INFRA AND ENGINEERING PVT. LTD.
(Civil Appeal No. 825 of 2021)
MARCH 08, 2021
[R. F. NARIMAN, B. R. GAVAI AND
HRISHIKESH ROY, JJ.]
Arbitration and Conciliation Act, 1996 – ss.8, 11(6), (6A),
(7) – Petition filed by respondent u/s.11(6) for appointment of a
Sole Arbitrator on the basis of an alleged Consultancy Agreement
– Appellant denied execution of the Agreement – High Court held
that there was an Arbitration Agreement between the parties and a
Sole Arbitrator was appointed to adjudicate the disputes between
the parties – On appeal, held: Certain emails and correspondence
do show that there was some dealing between the appellant and the
respondent qua a tender floated by South Bihar Power Distribution
Company Ltd. (SBPDCL) – However, that is not sufficient to
conclude that there was a concluded contract between the parties
containing an arbitration clause – A deeper consideration of
whether an arbitration agreement exists between the parties must
be left to an Arbitrator who is to examine the documentary evidence
produced before him in detail after witnesses are cross-examined
on the same – Impugned judgment in so far as it conclusively finds
that there is an Arbitration Agreement between the parties, set aside
– However, the ultimate order appointing a retired Judge the Sole
Arbitrator is upheld – Arbitrator to first determine the preliminary
issue as to whether an Arbitration Agreement exists between the
parties and decide the merits of the case only if such an agreement
exists – Arbitration and Conciliation (Amendment) Act, 2015.
Arbitration and Conciliation Act, 1996 – ss.8, 11, 11(6),
11(6A), 11(7), 37 – Law Commission Report – Arbitration and
Conciliation (Amendment) Act, 2015 – Orders appealable under
the Act – Held: By a process of judicial interpretation, Vidya Drolia
v. Durga Trading Corporation reported as (2021) 2 SCC 1 read the
“prima facie test” into s.11(6A) so as to bring the provisions of
ss.8(1) and 11(6) r/w 11(6A) on par – Considering that s.11(7) and
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s.37 were not amended, an anomaly arises – In light of what has
been decided in Vidya Drolia, the Parliament may need to have a re-
look at s.11(7) and s.37 so that orders made u/ss.8 and 11 are
brought on par qua appealability as well.
Words & Phrases – “existence” in s.11(6A) – Meaning of –
Discussed – Arbitration and Conciliation Act, 1996.
Partly allowing the appeal, the Court
HELD: 1. The 246th Law Commission Report not only
discussed the changes that are to be made bearing in mind the
difficulties that arose earlier, but also provided for amendments
that were to be made to Sections 8 and 11. Section 37 which is
the appeal provision, was also sought to be amended. When
Parliament enacted the 2015 amendment pursuant to the Law
Commission Report, it followed the Scheme of the Law
Commission’s Report qua Section 8 and Section 37 by enacting
the words “..... unless it finds that prima facie no valid arbitration
agreement exists......” in Section 8(1) and the insertion of sub-
clause (a) in Section 37(1) providing an appeal in an order made
under Section 8, which refuses to refer parties to arbitration.
However, so far as Section 11(6) and Section 11(6A) are
concerned, what was recommended by the Law Commission was
not incorporated. Section 11(6A) merely confines examination of
the Court to the existence of an arbitration agreement. Section
11(7) was retained, by which no appeal could be filed under an
order made under Section 11(6) read with Section
11(6A), whether
the Court’s determination led to a finding that the arbitration
agreement existed or did not exist on the facts of a given case.
Concomitantly, no amendment was made to Section 37(1), as
recommended by the Law Commission. However, by a process
of judicial interpretation, Vidya Drolia has now read the “prima
facie test” into Section 11(6A) so as to bring the provisions of
Sections 8(1) and 11(6) r/w 11(6A) on par. Considering that Section
11(7) and Section 37 have not been amended, an anomaly thus
arises. Whereas in cases decided under Section 8, a refusal to
refer parties to arbitration is appealable under Section 37(1)(a),
a similar refusal to refer parties to arbitration under Section 11(6)
read with Sections 6(A) and 7 is not appealable. In the light of
what has been decided in Vidya Drolia, Parliament may need to
PRAVIN ELECTRICALS PVT. LTD. v. GALAXY INFRA AND
ENGINEERING PVT. LTD.
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have a re-look at Section 11(7) and Section 37 so that orders
made under Sections 8 and 11 are brought on par qua appealability
as well. [Paras 19-21][1191-G-H; 1194-G; 1195-D-H; 1196-A]
Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman
(2019) 8 SCC 714 : [2019] 12 SCR 123; Vidya Drolia
v. Durga Trading Corporation (2021) 2 SCC 1 – relied
on.
Vidya Drolia v. Durga Trading Corporation (2019) 20
SCC 406 – referred to.
246th Law Commission Report – referred to.
2.1 There are no negotiations which lead upto the 7th July,
2014 Agreement (the alleged Consultancy Agreement) that are
on record. Negotiations that take place take place only after 7th
July, 2014 in which a draft agreement is deliberated upon between
the same parties. It would stretch incredulity to state that on the
same subject matter negotiations and a draft agreement would
be spoken about after a final signed agreement has been agreed
upon between the parties. The Notary who is said to have
notarized the Agreement was not licensed to do so the same, his
license having expired earlier, a fact that is accepted even by the
Respondents.  Even otherwise, some of the Single Judge’s
conclusions are plainly incorrect and against the record. An
invoice was raised on M/s Process Construction and Technical
Services Pvt. Ltd. (Process), Process making payment on 29th
September, 2014 and not the Appellant. Equally, the finding that
a draft Consultancy Agreement was sent
on 15th July, 2014
containing an arbitration clause, parties being ad idem regarding
submission of the disputes to arbitration is also plainly incorrect
in view of the fact that on the same day, an email was sent back in
which various terms were disputed, there being no concluded
contract between the parties. Also, the finding that Process was
a sub-contractor of the Respondent, is contrary to the pleadings
between the parties which had ranged from Process being a joint
venture partner of the Appellant to Process having common
Directors with the Appellant, and to Process thereafter being
described as the lead partner. Sub-contractor-ship is not pleaded
at all by the Respondent, the aforesaid arising only from written
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submissions made before the Single Judge. The allegation that
the Consultancy Agreement of 7th July, 2014 had a signature
that may not be that of Mr. MGS was brushed aside stating that
an arbitration agreement need not be signed by the parties. That
is entirely besides the point. Mr. MGS sworn to an affidavit filed
before the High Court that the signatures appearing on the 7th
July, 2014 agreement are not his signatures, as a result of which
the Appellant cannot be said to have entered into an agreement
at all on 7th July, 2014. Again, the Single Judge’s finding that
there exists an arbitration agreement between the parties as
contained in the “draft agreement” exchanged by email dated
7th July, 2014, is incorrect for two reasons. The draft agreement
sent by email was exchanged on 15th July, 2014 and not on 7th
July, 2014. Secondly, the email in reply to the email of 15th July,
2014 shows that there was no concluded contract between the
parties. Also, the pleading with which the parties went to Court
was that there was a concluded contract between the parties on
7th July, 2014. There was no pleading that on 15th July, 2014, a
draft agreement was exchanged between the parties, as a result
of which a concluded contract emanated therefrom.
[Paras 23-26][1196-D-G; 1197-A-G]
2.2 The emails dated 22nd July, 2014 and 25th July, 2014
produced here for the first time as well as certain correspondence
between SBPDCL and the Respondent do show that there is some
dealing between the Appellant and the Respondent qua a tender
floated by SBPDCL, but that is not sufficient to conclude that
there is a concluded contract between the parties, which contains
an arbitration clause. Given the inconclusive nature of the finding
by CFSL together with the signing of the agreement in Haryana
by parties whose registered offices are at Bombay and Bihar qua
works to be executed in Bihar; given the fact that the Notary
who signed the agreement was not authorised to do so and various
other conundrums that arise on the facts of this case, it is unsafe
to conclude, one way or the other, that an arbitration agreement
exists between the parties. The prima facie review spoken of in
Vidya Dhrolia can lead to only one conclusion on the facts of this
case - that a deeper consideration of whether an arbitration
agreement exists between the parties must be left to an Arbitrator
PRAVIN ELECTRICALS PVT. LTD. v. GALAXY INFRA AND
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who is to examine the documentary evidence produced before
him in detail after witnesses are cross-examined on the same.
For all these reasons, the impugned judgment of the Delhi High
Court is set aside in so far as it conclusively finds that there is an
Arbitration Agreement between the parties. However, the
ultimate order appointing a retired Delhi High Court Judge as a
Sole Arbitrator is upheld. The Judge will first determine as a
preliminary issue as to whether an Arbitration Agreement exists
between the parties, and go on to decide the merits of the
case only if it is first found that such an agreement exists.
[Para 27][1198-B-F]
Case Law Reference
[2019] 12 SCR 123
relied on
Para 11
(2021) 2 SCC 1
relied on
Para 12
(2019) 20 SCC 406
referred to
Para 12
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 825
of 2021.
From the Judgment and Order dated 12.05.2020 of the High Court
of Delhi at New Delhi in Arbitration Petition No. 674 of 2018.
Shyam Divan, Sr. Adv., Saswat Pattnaik, Govind Manoharan,
Hasan Murtaza, Advs. for the Appellant.
Dhruv Mehta Sr. Adv., Ms. Minakshi Jyoti, Dharamveer Singh,
Keith Varghese, Surya Hari Kamuju, Ms. Divya Roy, Advs. for the
respondent.
The Judgment of the Court was delivered by
R. F. NARIMAN, J.
1. Leave granted.
2. This appeal arises out of a petition filed under Section 11(6) of
the Arbitration and Conciliation Act, 1996, for appointment of a Sole
Arbitrator for adjudication of
disputes between the parties. The
Respondent, Galaxy Infra and Engineering Pvt. Ltd., is a company
incorporated under the provisions of the Companies Act, 1956, having
its registered office at Village Arra Gadh, Post Office Dharhara, Dist.
Vaishali, P.S. Hajipur, Bihar and is in the business of providing consultancy
services. The Appellant, Pravin Electricals Pvt. Ltd., operates in key
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industrial and commercial retail sectors and provides services for
electrical supplies etc.
3. On 26th May, 2014, an online tender was invited by Chief
Engineer, South Bihar Power Distribution Company Ltd. (hereinafter
referred to as “SBPDCL”) for appointment of implementing agencies
for execution of a Scheme, on turnkey basis, for strengthening,
improvement and augmentation of distribution systems capacities of 20
towns in Bihar. The Appellant submitted its technical and financial bid
and was declared the L1 bidder and was awarded the work on 22nd
September, 2014. It is the case of the Respondent that it had made
substantial efforts under a Consultancy Agreement dated 7th July, 2014,
to facilitate the Appellant in getting the aforesaid contract for which it
was entitled to commission. It is then alleged that the Appellant sent an
email dated 15th July, 2014 to the Respondent with a draft agreement
attached for comments and confirmation. On the same day, the
Respondent sent its reply stating that certain terms were not acceptable.
In emails that have surfaced for the first time in this Court dated 22nd
July, 2014 and 25th July, 2014, the Respondent argued that, in point of
fact, all differences between the parties were ironed out and a Final
Consultancy Agreement was agreed upon through correspondence
between the parties.
4. The Respondent alleged that it had raised an invoice on 27th
September, 2014, for payment of Rs.28.09 lakhs as an advance for
consultancy charges including service tax. It is important to note that the
said invoice was addressed to one M/s Process Construction and
Technical Services Pvt. Ltd. (hereinafter referred to as “Process”) and
makes reference to an agreement entered into between the Respondent
and Process. Also, on 24th April, 2016, the Respondent alleged that it
raised yet another invoice on the Appellant. This invoice was also
addressed to Process and makes reference to an agreement between
the Respondent and Process. Ledger accounts that were produced in
the normal course of business by the Respondent reflects transactions
with Process and not the Appellant. Finally, vide an email dated 30th
June, 2017, the Respondent attached the final invoice to the Appellant
claiming an amount of Rs.5.54 crores under the alleged Consultancy
Agreement dated 7th July, 2014. This was followed up by a demand-
cum-legal notice dated 9th March, 2018, seeking payment of
Rs.5,54,14,318/- from the Appellant as being due under the alleged
PRAVIN ELECTRICALS PVT. LTD. v. GALAXY INFRA AND
ENGINEERING PVT. LTD. [R. F. NARIMAN, J.]
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Consultancy Agreement dated 7th July, 2014. Vide its reply dated 22nd
March, 2018, the Appellant recorded its surprise on receiving such demand
notice and flatly denied that any agreement dated 7th July, 2014, was
ever entered into between the parties. The Appellant further requested
the Respondent to provide a copy of the alleged Agreement dated 7th
July, 2014 and payment details referred to in the legal notice.
5. On 26th April, 2018, the Respondent invoked Article 14 of the
alleged Consultancy Agreement dated 7th July, 2014, in which they
nominated one Kameshwar Choudhary as Sole Arbitrator to adjudicate
differences between the parties. On 3rd May, 2018, the Appellant denied
execution of the Agreement dated 7th July, 2014 and, therefore, stated
that the matter could not be referred to arbitration. We are informed that
on 14th May, 2018, the Respondent’s Advocates finally supplied a copy
of the alleged Agreement dated 7th July, 2014 to the Appellant.
6. On 7th September, 2018, the Respondent then filed a petition
under Section 11(6) of the 1996 Act for appointment of a Sole Arbitrator
on the basis of the alleged Agreement dated 7th July, 2014. The Delhi
High Court vide an order dated 28th November, 2018, directed the
Respondent to produce the original of the Consultancy Agreement dated
7th July, 2014. The Appellant was then directed to produce Mr. M.G.
Stephen, Managing Director of the Appellant, before the
Registrar
(Judicial) on 7th December, 2018, so that he can carry with him documents
which bear his original signature at the contemporaneous time. The
Registrar (Judicial) was also directed to obtain specimen signatures of
Mr. M.G. Stephen. The original of the Agreement together with the
aforesaid signatures of Mr. M.G. Stephen was then to be sent to the
CFSL for obtaining a report. The report was then received and by an
order dated 20th September, 2019, the High Court directed that copies of
the report be given to the learned counsel for the parties. Finally, on 30th
September, 2019, the learned counsel for the Appellant submitted that
he had instructions to contest the matter after which the impugned
judgment dated 12th May, 2020 was passed.
7. Vide the impugned judgment, the learned Single Judge of the
Delhi High Court referred to the alleged Consultancy Agreement dated
7th July, 2014 and the correspondence between the parties, including the
correspondence between SBPDCL and the Respondent herein. After
going through the aforesaid, the learned Single Judge then held:
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“39. Learned counsel for the petitioner has drawn the attention of
the Court to various emails which indicate that a Consultancy
Agreement was executed between the parties on 07.07.2014. In
the said agreement, the parties agreed on the percentage of fee
that the petitioner would get in case the respondent succeeded in
getting the tender from SBPDCL. On 15.07.2014 the respondent
had sent an email with a soft copy of the agreement suggesting a
certain percentage of the consultancy fee. Subsequent emails are
also placed on record which show that payment terms were being
discussed between the parties. Email dated 30.06.2017 is also on
record by which a final invoice was sent by the petitioner clearly
making a reference to the Agreement dated 07.07.2014. None of
these documents have been denied by the respondent. Learned
counsel for the petitioner has also pointed out that the respondent
even made payments in accordance with the terms of the
Agreement. As per the payment terms, Rs.25 Lakhs was payable
on receipt of LOI by the respondent from SBPDCL. Admittedly
on 22.09.2014, LOI was awarded to the respondent and on the
petitioner raising an invoice for Rs.25 Lakhs on 27.09.2014,
respondent actually made payment on 29.09.2014. Counsel for
the petitioner has also shown the email dated 27.09.2014 whereby
the respondent had asked the petitioner to raise the invoice on its
letterhead. These documents in my view clearly indicate that the
parties had entered into an
Agreement pursuant to which the
parties had acted. The petitioner had assisted the respondent in
the award of the LOI and the respondent had initially made
payments in terms of the said agreement dated 07.07.2014.
Learned counsel for the Petitioner is also right in submitting that
on 15.07.2014, the respondent had itself sent an email containing
a Draft Consultancy Agreement which contained Article 14, which
was the Arbitration Clause. The parties were thus ad idem
regarding submission of disputes to Arbitration.
40. The fact that there was an Agreement between the parties is
also fortified by the fact that the information sent by the
Department to the respondent regarding award of the Contract to
the respondent was also sent to the petitioner vide email dated
22.09.2014. Draft letter of acceptance sent by the Department to
the petitioner through email dated 25.09.2014 was sent by the
petitioner to the respondent on the same day, by an email.
PRAVIN ELECTRICALS PVT. LTD. v. GALAXY INFRA AND
ENGINEERING PVT. LTD. [R. F. NARIMAN, J.]
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41. Learned counsel for the respondent in my view is not correct
in its contention that since a draft agreement was emailed by the
respondent, there was no executed agreement dated 07.07.2014.
From the email dated 15.07.2014, it is apparent that the respondent
had executed an Agreement prior to 15.07.2014. Petitioner had
categorically stated in the email dated 15.07.2014 that the payment
terms in the draft agreement were different and there is no
document on record filed by the respondent evidencing denial of
the contents of this email.
42. In so far as the argument that the invoices were raised on
PCTSPL and not on the petitioner is concerned, petitioner is
correct in its submission that PCTSPL was only a sub-contractor
of the respondent. Petitioner had not raised the invoice on its own
will. Counsel for the petitioner has pointed out the email dated
24.09.2019 sent by PCTSPL to the respondent i.e. Mr. Manoj
Panikar to Mr. Stephen whereby PCTSPL had emailed the draft
invoice to the respondent and sought confirmation whether it could
be sent to the petitioner and finally, the revised draft invoice was
sent to the petitioner on 27.09.2019 by PCTSPL.
43. The contention of the respondent that it was PCTSPL which
had made payments to the petitioner and this was on account of
their own inter se business relationships has no merit. The invoice
placed on record clearly shows that this was with respect to the
contract
awarded to the respondent by the Department with which
admittedly PCTSPL had no direct relationship. This itself is
indicative of the fact that dehors the addressee of the invoices,
the same were with respect to the contract given by the department
to the respondent and for which the petitioner was a consultant.
44. In so far as the contention of the respondent that the
Consultancy Agreement dated 07.07.2014 did not have the
signatures of Mr. M.G. Stephen and therefore, cannot be accepted
as an agreement between the parties, is without merit. As
mentioned in the earlier part of the judgment, it is not mandatory
for an Arbitration Agreement that it must be signed by the parties.
The Supreme Court in case of Caravel Shipping Services Pvt.
Ltd. vs. M/s. Premier Sea Foods (2019) 11 SCC 461, has clearly
held as under:
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“8. In addition, we may indicate that the law in this behalf, in
Jugal Kishore Rameshwardas v. Goolbai Hormusji, AIR 1955
SC 812, is that an arbitration agreement needs to be in writing
though it need not be signed. The fact that the arbitration agreement
shall be in writing is continued in the 1996 Act in Section 7(3)
thereof. Section 7(4) only further adds that an arbitration agreement
would be found in the circumstances mentioned in the three sub-
clauses that make up Section 7(4). This does not mean that in all
cases an arbitration agreement needs to be signed. The only pre-
requisite is that it be in writing, as has been pointed out in Section
7(3).”
45. In my view, the documents placed on record by the petitioner
clearly evidence that there exists an Arbitration Agreement
between the parties as contained in the draft agreement exchanged
by email dated 07.07.2014. The present case squarely falls within
the ambit of Section 7(4)(b) of the Act. The inevitable result is
that the parties must be referred to Arbitration for adjudication of
their disputes.” 
Accordingly, Justice G.S. Sistani, a former Judge of the Delhi High
Court was appointed as the Sole Arbitrator to adjudicate the dispute
between the parties.
8. Shri Shyam Divan, learned Senior Advocate, appearing on behalf
of the Appellant, has argued that the alleged Consultancy Agreement
dated 7th July, 2014 is a concocted document. This is clear from the
CFSL report dated 29th September, 2019, on
which he relied very heavily.
This being the case, since the alleged Consultancy Agreement itself had
no existence, there was no arbitration agreement between the parties,
as a result of which the High Court judgment fell to the ground. He also
argued that this is the only case of its kind in which a formal signed
agreement is alleged to have been entered into between the parties,
after which negotiations take place and a draft agreement is referred to.
The very fact that negotiations have taken place after such alleged
agreement shows that such alleged agreement does not in fact exist. He
also went on to argue that the agreement is notarized at Faridabad,
Haryana, when the parties are from Mumbai and Bihar respectively. He
has also produced documents to show that the so-called Notary’s license
had expired way before notarization allegedly took place on 7th July,
2014. He argued that once the case that is pleaded between the parties
PRAVIN ELECTRICALS PVT. LTD. v. GALAXY INFRA AND
ENGINEERING PVT. LTD. [R. F. NARIMAN, J.]
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is found to be incorrect, the Respondent cannot now be allowed to rely
upon documents produced here for the first time to show that even apart
from the pleaded case namely, the Consultancy Agreement dated 7th
July, 2014, yet, an agreement is made out in correspondence between
the parties after the said date. He attacked the Delhi High Court judgment
arguing that the findings that were made qua invoices being raised and
payments being made are wholly incorrect in that such invoices were
raised and payments were made only by Process under a separate
agreement entered into between the Respondent and Process. He also
stated that if the pleadings of this case are perused, Process has been
described by the Respondent as a Joint Venture partner with the Appellant
in one place, then described as a private company who has common
directors with the Appellant; and then finally described as a Sub-Contractor
only in the written submissions filed before Delhi High Court, which last
appellation has been accepted by the High Court completely wrongly.
Even in the Counter Affidavit filed before this Court, yet another plea is
taken that Process is the lead partner of the Appellant. For all these
reasons, the learned Senior Advocate submits that the judgment under
appeal ought to be set aside.
9. Shri Dhruv Mehta, learned Senior Advocate appearing on behalf
of the Respondent, has taken us through all the correspondence again in
order
to show that even if the Consultancy Agreement dated 7th July,
2014 is not relied upon, yet, an arbitration clause exists in that the draft
agreement that was exchanged between the parties culminated in a final
agreement on 25th July, 2014. In any case, if the correspondence between
SBPDCL and the Respondent is to be seen with CCs being marked to
the Appellant, it is clear that the Respondent acted as a go-between and
successfully obtained the bid for the Appellant having earned its
commission thereon. He argued that the judgment under appeal does
not require interference in that the CFSL report was also inconclusive
and that the correspondence referred to by the learned Single Judge of
the High Court would clearly show that the dramatis personae in this
case interacted with each other and that, but for the efforts of his client,
Pravin Electricals Pvt. Ltd. would never have got the bid. He relied
upon a number of judgments of this Court to buttress his submissions.
10. Having heard learned counsel for both the parties, it is important
to first set out the relevant provisions of the Arbitration and Conciliation
Act, 1996:
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8. Power to refer parties to arbitration where there is an
arbitration agreement. —
(1) A judicial authority, before which an action is brought in a
matter which is the subject of an arbitration agreement shall, if a
party to the arbitration agreement or any person claiming through
or under him, so applies not later than the date of submitting his
first statement on the substance of the dispute, then,
notwithstanding any judgment, decree or order of the Supreme
Court or any Court, refer the parties to arbitration unless it finds
that prima facie no valid arbitration agreement exists.
11. Appointment of arbitrators. —
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(6) 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 Supreme Court or, as the case may be,
the High Court or any person or institution designated by such
Court 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.
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(7) A decision on a matter entrusted by sub-section (4) or sub-
section (5) or sub-section (6) to 3 the Supreme Court or, as the
case may be, the High Court or the person or institution designated
by such Court is final and no appeal including Letters Patent Appeal
shall lie against such decision.
PRAVIN ELECTRICALS PVT. LTD. v. GALAXY INFRA AND
ENGINEERING PVT. LTD. [R. F. NARIMAN, J.]
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11. Sections 8 and 11 were amended pursuant to a detailed Law
Commission Report being the 246th Law Commission Report on
Arbitration. The history of the law prior to 2015 is set out in the aforesaid
Report and the changes made therein are reflected by this Court in its
judgment in Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman,
(2019) 8 SCC 714 as under:
“9. The 246th Law Commission Report dealt with some of these
judgments and felt that at the stage of a Section 11(6) application,
only “existence” of an arbitration agreement ought to be looked
at and not other preliminary issues. In a recent judgment of this
Court, namely, Garware Wall Ropes Ltd. v. Coastal Marine
Constructions & Engg. Ltd., (2019) 9 SCC 209, this Court
adverted to the said Law Commission Report and held:
“8. The case law under Section 11(6) of the Arbitration Act, as it
stood prior to the Amendment Act, 2015, has had a chequered
history.
9. In Konkan Railway Corpn. Ltd. v. Mehul Construction Co.,
(2000) 7 SCC 201 (Konkan Railway 1), it was held that the powers
of the Chief Justice under Section 11(6) of the 1996 Act are
administrative in nature, and that the Chief Justice or his designate
does not act as a judicial authority while appointing an arbitrator.
The same view was reiterated in Konkan Railway Corpn. Ltd.
v. Rani Construction (P) Ltd., (2002) 2 SCC 388 (Konkan
Railway 2).
10. However, in SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC
618, a
seven-Judge Bench overruled this view and held that the
power to appoint an arbitrator under Section 11 is judicial and not
administrative. The conclusions of the seven-Judge Bench were
summarised in para 47 of the aforesaid judgment. We are concerned
directly with sub-paras (i), (iv) and (xii), which read as follows:
(SCC pp. 663-64)
‘(i) The power exercised by the Chief Justice of the High Court
or the Chief Justice of India under Section 11(6) of the Act is
not an administrative power. It is a judicial power.
***
(iv) The Chief Justice or the designated Judge will have the
right to decide the preliminary aspects as indicated in the earlier
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part of this judgment. These will be his own jurisdiction to
entertain the request, the existence of a valid arbitration
agreement, the existence or otherwise of a live claim, the
existence of the condition for the exercise of his power and on
the qualifications of the arbitrator or arbitrators. The Chief
Justice or the designated Judge would be entitled to seek the
opinion of an institution in the matter of nominating an arbitrator
qualified in terms of Section 11(8) of the Act if the need arises
but the order appointing the arbitrator could only be that of the
Chief Justice or the designated Judge.
***
(xii) The decision in Konkan Railway Corpn. Ltd. v. Rani
Construction (P) Ltd., (2002) 2 SCC 388 is overruled.’
11. This position was further clarified in National Insurance Co.
Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 as follows:
(SCC p. 283, para 22)
‘22. Where the intervention of the court is sought for
appointment of an Arbitral Tribunal under Section 11, the duty
of the Chief Justice or his designate is defined in SBP & Co.
(supra)This Court identified and segregated the preliminary
issues that may arise for consideration in an application under
Section 11 of the Act into three categories, that is, (i) issues
which the Chief Justice or his designate is bound to decide; (ii)
issues which he can also decide, that is, issues which he may
choose to decide; and (iii) issues which should be left to the
Arbitral Tribunal to decide.
22.1. The
issues (first category) which the Chief Justice/his
designate will have to decide 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.
22.2. The issues (second category) which the Chief Justice/his
designate may choose to decide (or leave them to the decision of
the Arbitral Tribunal) are:
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(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.
22.3. The issues (third category) which the Chief Justice/his
designate should leave exclusively to the Arbitral Tribunal are:
(i)
Whether a claim made falls within the arbitration
clause (as for example, a matter which is reserved
for final decision of a departmental authority and
excepted or excluded from arbitration).
(ii)
Merits or any claim involved in the arbitration.’
12. As a result of these judgments, the door was wide open for
the Chief Justice or his designate to decide a large number of
preliminary aspects which could otherwise have been left to be
decided by the arbitrator under Section 16 of the 1996 Act. As a
result, the Law Commission of India, by its Report No. 246
submitted in August 2014, suggested that various sweeping
changes be made in the 1996 Act. Insofar as SBP & Co. (supra)
and Boghara Polyfab (supra) are concerned, the Law
Commission examined the matter and recommended the addition
of a new sub-section, namely, sub-section (6-A) in Section 11. In
so doing, the Law Commission recommendations which are
relevant and which led to the introduction of Section 11(6-A) are
as follows:
‘28. The Act recognises situations where the intervention of
the
Court is envisaged at the pre-arbitral stage i.e. prior to the
constitution of the Arbitral Tribunal, which includes Sections 8,
9, 11 in the case of Part I arbitrations and Section 45 in the
case of Part II arbitrations. Sections 8, 45 and also Section 11
relating to “reference to arbitration” and “appointment of the
Tribunal”, directly affect the constitution of the Tribunal and
functioning of the arbitral proceedings. Therefore, their
operation has a direct and significant impact on the “conduct”
of arbitrations. Section 9, being solely for the purpose of securing
interim relief, although having the potential to affect the rights
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of parties, does not affect the “conduct” of the arbitration in
the same way as these other provisions. It is in this context the
Commission has examined and deliberated the working of these
provisions and proposed certain amendments.
29. The Supreme Court has had occasion to deliberate upon
the scope and nature of permissible pre-arbitral judicial
intervention, especially in the context of Section 11 of the Act.
Unfortunately, however, the question before the Supreme Court
was framed in terms of whether such a power is a “judicial”
or an “administrative” power — which obfuscates the real
issue underlying such nomenclature/description as to
- the scope of such powers — i.e. the scope of arguments
which a court (Chief Justice) will consider while deciding
whether to appoint an arbitrator or not — i.e. whether the
arbitration agreement exists, whether it is null and void, whether
it is voidable, etc.; and which of these it should leave for decision
of the Arbitral Tribunal.
- the nature of such intervention — i.e. would the court (Chief
Justice) consider the issues upon a detailed trial and whether
the same would be decided finally or be left for determination
of the Arbitral Tribunal.
30. After a series of cases culminating in the decision in SBP
& Co. v. Patel Engg. Ltd. (supra), the Supreme Court held
that the power to appoint an arbitrator under Section 11 is a
“judicial” power. The underlying issues in this judgment, relating
to the scope of
intervention, were subsequently clarified by
Raveendran, J. in National Insurance Co. Ltd. v. Boghara
Polyfab (P) Ltd. (supra), where the Supreme Court laid down
as follows: (SCC p. 283, para 22)
‘22.1. The issues (first category) which Chief Justice/his
designate will have to decide 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?
PRAVIN ELECTRICALS PVT. LTD. v. GALAXY INFRA AND
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22.2. The issues (second category) which the Chief Justice/
his designate may choose to decide 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?
22.3. The issues (third category) which the Chief Justice/
his designate should leave exclusively to the Arbitral Tribunal
are:
(a) Whether a claim made falls within the arbitration clause
(as for example, a matter which is reserved for final decision
of a departmental authority and excepted or excluded from
arbitration)?
(b) Merits of any claim involved in the arbitration.”
31. The Commission is of the view that, in this context, the same
test regarding scope and nature of judicial intervention, as
applicable in the context of Section 11, should also apply to Sections
8 and 45 of the Act — since the scope and nature of judicial
intervention should not change upon whether a party (intending to
defeat the arbitration agreement) refuses to appoint an arbitrator
in terms of the arbitration agreement, or moves a proceeding before
a judicial authority in the face of such an arbitration agreement.
32. In relation to the nature of intervention, the exposition of the
law is to be found in the decision of the Supreme Court in Shin-
Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd.,
(2005) 7 SCC
234, (in the context of Section 45 of the Act), where the Supreme
Court has ruled in favour of looking at the issues/controversy only
prima facie.
33. It is in this context, the Commission has recommended
amendments to Sections 8 and 11 of the Arbitration and Conciliation
Act, 1996. The scope of the judicial intervention is only restricted
to situations where the court/judicial authority finds that the
arbitration agreement does not exist or is null and void. Insofar as
the nature of intervention is concerned, it is recommended that in
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the event the court/judicial authority is prima facie satisfied against
the argument challenging the arbitration agreement, it shall appoint
the arbitrator and/or refer the parties to arbitration, as the case
may be. The amendment envisages that the judicial authority shall
not refer the parties to arbitration only if it finds that there does
not exist an arbitration agreement or that it is null and void. If the
judicial authority is of the opinion that prima facie the arbitration
agreement exists, then it shall refer the dispute to arbitration, and
leave the existence of the arbitration agreement to be finally
determined by the Arbitral Tribunal. However, if the judicial
authority concludes that the agreement does not exist, then the
conclusion will be final and not prima facie. The amendment also
envisages that there shall be a conclusive determination as to
whether the arbitration agreement is null and void. In the event
that the judicial authority refers the dispute to arbitration and/or
appoints an arbitrator, under Sections 8 and 11 respectively, such
a decision will be final and non-appealable. An appeal can be
maintained under Section 37 only in the event of refusal to refer
parties to arbitration, or refusal to appoint an arbitrator.’
13. Pursuant to the Law Commission recommendations, Section
11(6-A) was introduced first by Ordinance and then by the
Amendment Act, 2015. The Statement of Objects and Reasons
which were appended to the Arbitration
and Conciliation
(Amendment) Bill, 2015 which introduced the Amendment Act,
2015 read as follows:
‘Statement of Objects and Reasons
***
6. It is proposed to introduce the Arbitration and Conciliation
(Amendment) Bill, 2015, to replace the Arbitration and
Conciliation (Amendment) Ordinance, 2015, which inter alia,
provides for the following, namely—
(i)
to amend the definition of “Court” to provide that in the
case of international commercial arbitrations, the Court
should be the High Court;
(ii)
to ensure that an Indian Court can exercise jurisdiction
to grant interim measures, etc., even where the seat of
the arbitration is outside India;
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(iii)
an application for appointment of an arbitrator shall be
disposed of by the High Court or Supreme Court, as the
case may be, as expeditiously as possible and an
endeavour should be made to dispose of the matter within
a period of sixty days;
(iv)
to provide that while considering any application for
appointment of arbitrator, the High Court or the Supreme
Court shall examine the existence of a prima facie
arbitration agreement and not other issues;
(v)
to provide that the Arbitral Tribunal shall make its award
within a period of twelve months from the date it enters
upon the reference and that the parties may, however,
extend such period up to six months, beyond which period
any extension can only be granted by the Court, on
sufficient cause;
(vi)
to provide that a model fee schedule on the basis of
which High Courts may frame rules for the purpose of
determination of fees of Arbitral Tribunal, where a High
Court appoints arbitrator in terms of Section 11 of the
Act;
(vii)
to provide that the parties to dispute may at any stage
agree in writing that their dispute be resolved through
fast-track procedure and the award in such cases shall
be made within a period of six months;
(viii) to provide for neutrality of arbitrators, when a person is
approached in connection with possible appointment as
an arbitrator;
(ix)
to provide that application to challenge the award is to
be disposed of by the Court within one
year.
7. The amendments proposed in the Bill will ensure that
arbitration process becomes more user-friendly, cost effective
and leads to expeditious disposal of cases.’
14. A reading of the Law Commission Report, together with the
Statement of Objects and Reasons, shows that the Law
Commission felt that the judgments in Patel Engg. Ltd.,(supra)
and Boghara Polyfab (supra) required a relook, as a result of
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which, so far as Section 11 is concerned, the Supreme Court or,
as the case may be, the High Court, while considering any
application under Sections 11(4) to 11(6) is to confine itself to the
examination of the existence of an arbitration agreement and leave
all other preliminary issues to be decided by the arbitrator.”
12. The need for reference to any other case law is obviated by a
recent Three-Judge Bench judgment in Vidya Drolia v. Durga Trading
Corporation, (2021) 2 SCC 1. This Three-Judge Bench judgment arose
out of a reference made to 3 learned Judges in Vidya Drolia v. Durga
Trading Corporation, (2019) 20 SCC 406. Sanjiv Khanna, J. speaking
for the Court set out the question that arose before the Court as follows:
“1. This judgment decides the reference to three Judges made
vide order dated 28-2-2019 in Vidya Drolia v. Durga Trading
Corpn., (2019) 20 SCC 406, as it doubts the legal ratio expressed
in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017)
10 SCC 706 that landlord-tenant disputes governed by the
provisions of the Transfer of Property Act, 1882, are not arbitrable
as this would be contrary to public policy.
2. A deeper consideration of the order of reference reveals that
the issues required to be answered relate to two aspects that are
distinct and yet interconnected, namely:
2.1. (i) Meaning of non-arbitrability and when the subject-matter
of the dispute is not capable of being resolved through arbitration.
2.2. (ii) The
conundrum — “who decides” — whether the court
at the reference stage or the Arbitral Tribunal in the arbitration
proceedings would decide the question of non-arbitrability.
2.3. The second aspect also relates to the scope and ambit of
jurisdiction of the court at the referral stage when an objection of
non-arbitrability is raised to an application under Section 8 or 11
of the Arbitration and Conciliation Act, 1996 (for short “the
Arbitration Act”).
13. The Bench then went into the Law Commission’s 246th Report
as follows:
124. In order to appreciate the effect of the amendments made
by Act 3 of 2016, it would be appropriate to refer to the Law
Commission’s 246th Report which had given reasons for
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amendments to Sections 8 and 11 of the Arbitration Act, including
insertion of sub-section (6-A) to Section 11. The said reasons
read as under:
“24. Two further sets of amendments have been proposed in
this context. First, it is observed that a lot of time is spent for
appointment of arbitrators at the very threshold of arbitration
proceedings as applications under Section 11 are kept pending
for many years. In this context, the Commission has proposed
a few amendments. The Commission has proposed changing
the existing scheme of the power of appointment being vested
in the “Chief Justice” to the “High Court” and the “Supreme
Court” and has expressly clarified that delegation of the power
of “appointment” (as opposed to a finding regarding the
existence/nullity of the arbitration agreement) shall not be
regarded as a judicial act. This would rationalise the law and
provide greater incentive for the High Court and/or Supreme
Court to delegate the power of appointment (being a non-judicial
act) to specialised, external persons or institutions. The
Commission has further recommended an amendment to
Section 11(7) so that decisions of the High Court (regarding
existence/nullity of the arbitration agreement) are final where
an arbitrator has been appointed, and as such are non-
appealable. The Commission further proposes the addition of
Section 11(13) which requires the Court to make an endeavour
to dispose of the matter
within sixty days from the service of
notice on the opposite party.
***
The Law Commission’s Report specifically refers to the decision
of this Court in Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre
Ltd., (2005) 7 SCC 234, a decision relating to transnational
arbitration covered by the New York Convention.
14. Dealing with “prima facie” examination under Section 8, as
amended, the Court then held:
134. 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
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the side branches in straightforward 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 and in this context,
the observations of B.N. Srikrishna, J. of “plainly arguable” case
in Shin-Etsu Chemical Co. Ltd. are of importance and relevance.
Similar views are expressed by this Court in Vimal Kishor
Shah v. Jayesh Dinesh Shah, (2016) 8 SCC wherein the test
applied at the pre-arbitration stage was whether there is a “good
arguable case” for the existence of an arbitration agreement.
15. The parameters of review under Sections 8 and 11 were then
laid down thus:
138. In the Indian context, we would respectfully adopt the three
categories in Boghara Polyfab (P) Ltd. 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 centralised 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 statute(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.
PRAVIN ELECTRICALS PVT. LTD. v. GALAXY INFRA AND
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139. We would not like to be too prescriptive, albeit observe that
the court may for legitimate reasons, to prevent wastage of public
and private resources, can exercise judicial discretion to conduct
an intense yet summary prima facie review while remaining
conscious that it is to assist the arbitration procedure and not usurp
jurisdiction of the Arbitral Tribunal. Undertaking a detailed full
review or a long-drawn review at the referral stage would obstruct
and cause delay undermining the integrity and efficacy of
arbitration as a dispute resolution mechanism. Conversely, if the
court becomes too reluctant to intervene, it may undermine
effectiveness of both the arbitration and the court. There are
certain cases where the prima facie examination may require a
deeper consideration. The court’s challenge is to find the right
amount of and the context when it would examine the prima facie
case or exercise restraint. 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. [Ozlem Susler, “The English
Approach to Competence-Competence” Pepperdine Dispute
Resolution Law Journal, 2013, Vol. 13.]
140. Accordingly, when it appears that prima facie review would
be inconclusive, or on consideration inadequate as it requires
detailed examination, the matter should be left for final
determination by the Arbitral Tribunal selected by the parties by
consent. The underlying rationale being not to delay or defer and
to discourage parties from using referral proceeding as a ruse to
delay and obstruct. In such cases a full review by the courts at
this stage would encroach on the jurisdiction of the Arbitral Tribunal
and violate the legislative scheme allocating jurisdiction between
the courts and the Arbitral Tribunal. Centralisation of litigation
with the Arbitral Tribunal as the primary and first adjudicator is
beneficent as it helps in quicker and efficient resolution of disputes.
16. The Court then examined the meaning of the expression
“existence” which occurs in Section 11(6A) and summed up its discussion
as follows:
146. We now proceed to examine the question, whether the word
“existence” in Section 11 merely refers to contract formation
(whether there is an arbitration agreement) and excludes the
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question of enforcement (validity) and therefore the latter falls
outside the jurisdiction of the court at the referral stage. On
jurisprudentially and textualism it is possible to differentiate
between existence of an arbitration agreement and validity of an
arbitration agreement. Such interpretation can draw support from
the plain meaning of the word “existence”. However, it is equally
possible, jurisprudentially and on contextualism, to hold that an
agreement has no existence if it is not enforceable and not binding.
Existence of an arbitration agreement presupposes a valid
agreement which would be enforced by the court by relegating
the parties to arbitration. Legalistic and plain meaning interpretation
would be contrary to the contextual background including the
definition clause and would result in unpalatable consequences. A
reasonable and just interpretation of “existence” requires
understanding the context, the purpose and the relevant legal norms
applicable for a binding and enforceable arbitration agreement.
An agreement evidenced in writing has no meaning unless the
parties can be compelled to adhere and abide by the terms. A
party cannot sue and claim rights based on an unenforceable
document. Thus, there are good reasons to hold that an arbitration
agreement exists only when it is valid and legal. A void and
unenforceable understanding is no agreement to do anything.
Existence of an arbitration agreement means an arbitration
agreement that
meets and satisfies the statutory requirements of
both the Arbitration Act and the Contract Act and when it is
enforceable in law.
147. We would proceed to elaborate and give further reasons:
147.1. In Garware Wall Ropes Ltd. v. Coastal Marine
Constructions & Engg. Ltd., (2019) 9 SCC 209, this Court had
examined the question of stamp duty in an underlying contract
with an arbitration clause and in the context had drawn a distinction
between the first and second part of Section 7(2) of the Arbitration
Act, albeit the observations made and quoted above with reference
to “existence” and “validity” of the arbitration agreement being
apposite and extremely important, we would repeat the same by
reproducing para 29 thereof: (SCC p. 238)
“29. This judgment in United India Insurance Co. Ltd. v.
Hyundai Engg. & Construction Co. Ltd., (2018) 17 SCC
607 is important in that what was specifically under
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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” in Hyundai Engg. case, as followed by us.”
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.
147.2. 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 Merriam-Webster 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.
147.3. Most scholars and jurists accept and agree that the existence
and validity of an arbitration agreement are the same. Even Stavros
Brekoulakis accepts that validity, in terms of substantive and formal
validity, are questions of contract and hence for the court to
examine.
147.4. Most jurisdictions accept and require prima facie review
by the court on non-arbitrability aspects at the referral stage.
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147.5. Sections 8 and 11 of the Arbitration Act are complementary
provisions as was held in Patel Engg. 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”.
147.6. 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.
147.7. 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.
147.8. 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. In Subrata
Roy Sahara v. Union of India, (2014) 8 SCC 470, this Court has
observed: (SCC p. 642, para 191)
“191. The Indian judicial system is grossly afflicted with frivolous
litigation. Ways and means need to be evolved to deter litigants
from their compulsive obsession towards senseless and ill-
considered claims. One needs to keep in mind that in the process
of litigation, there is an innocent sufferer on the other side of
every irresponsible and senseless claim. He suffers long-drawn
anxious periods of nervousness and restlessness, whilst the
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litigation is pending without any fault on his part. He pays for
the litigation from out of his savings (or out of his borrowings)
worrying that the other side may trick him into defeat for no
fault of his. He spends invaluable time briefing counsel and
preparing them for his claim. Time which he should have spent
at work, or with his family, is lost, for no fault of his. Should a
litigant not be compensated for what he has lost for no fault?
The suggestion to the legislature is that a litigant who has
succeeded must be compensated by the one who has lost. The
suggestion to the legislature is to formulate a mechanism that
anyone who initiates and continues a litigation senselessly pays
for the same. It is suggested that the legislature should consider
the introduction of a “Code of Compulsory Costs”.”
147.9. Even in Duro Felguera, S.A. v. Gangavaram Port Ltd.,
(2017) 9 SCC 729, Kurian Joseph, J., in para 52, had referred to
Section 7(5) and thereafter in para 53 referred to a judgment of
this Court in M.R. Engineers & Contractors (P) Ltd. v. Som
Datt Builders Ltd., (2009) 7 SCC 696 to observe that the analysis
in the said case supports the final conclusion that the memorandum
of understanding in the said case did not incorporate an arbitration
clause. Thereafter, reference was specifically made to SBP &
Co. v. Patel Engg. Ltd., (2005) 8 SCC 618 and National
Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC
267 to observe that the legislative policy is essential to minimise
court’s interference at the pre-arbitral stage and this was the
intention of sub-section (6) to Section 11 of the Arbitration Act.
Para 48 in Duro Felguera specifically states that the resolution
has to exist in the arbitration agreement, and it is for the court to
see if the agreement contains a clause which provides for arbitration
of disputes which have arisen between the parties. Para 59 is
more restrictive and requires the court to see whether an arbitration
agreement exists — nothing more, nothing less. Read with the
other findings, it would be appropriate to read the two paragraphs
as laying down the legal ratio that the court is required to see if
the underlying contract contains an arbitration clause for arbitration
of the disputes which have arisen between the parties — nothing
more, nothing less. Reference to decisions in Patel Engg. Ltd.
and Boghara Polyfab (P) Ltd. was to highlight that at the
reference stage, post the amendments vide Act 3 of 2016, the
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court would not go into and finally decide different aspects that
were highlighted in the two decisions.
147.10. In addition to Garware Wall Ropes Ltd. case, this Court
in Narbheram Power & Steel (P) Ltd. [Oriental Insurance Co.
Ltd. v. Narbheram Power & Steel (P) Ltd., (2018) 6 SCC 534]
and Hyundai Engg. & Construction Co. Ltd. [United India
Insurance Co. Ltd. v. Hyundai Engg. & Construction Co. Ltd.,
(2018) 17 SCC 607] , both decisions of three Judges, has rejected
the application for reference in the insurance contracts holding
that the claim was beyond and not covered by the arbitration
agreement. The Court felt that the legal position was beyond doubt
as the scope of the arbitration clause was fully covered by the
dictum in Vulcan Insurance Co. Ltd. [Vulcan Insurance Co. Ltd.
v. Maharaj Singh, (1976) 1 SCC 943] Similarly, in PSA Mumbai
Investments Pte. Ltd. [PSA Mumbai Investments Pte. Ltd. v.
Jawaharlal Nehru Port Trust, (2018) 10 SCC 525] , this Court at
the referral stage came to the conclusion that the arbitration clause
would not be applicable and govern the disputes. Accordingly, the
reference to the Arbitral Tribunal was set aside leaving the
respondent to pursue its claim before an appropriate forum.
147.11. The interpretation appropriately balances the allocation
of the decision-making authority between the court at the referral
stage and the arbitrators’ primary jurisdiction to decide disputes
on merits. The court as the judicial forum of
the first instance can
exercise prima facie test jurisdiction to screen and knock down
ex facie meritless, frivolous and dishonest litigation. Limited
jurisdiction of the courts ensures expeditious, alacritous and
efficient disposal when required at the referral stage.
17. The Bench finally concluded:
153. Accordingly, 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. 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
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decide the disputes including the question of jurisdiction and non-
arbitrability.
154. Discussion under the heading “Who Decides Arbitrability?”
can be crystallised as under:
154.1. Ratio of the decision in Patel Engg. 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
9-8-2019), is no longer applicable.
154.2. Scope of judicial review and jurisdiction of the court under
Sections 8 and 11 of the Arbitration Act is identical but extremely
limited and restricted.
154.3. 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 non-arbitrability
post the award in terms of sub-clauses (i), (ii) or (iv) of Section
34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration
Act.
154.4. Rarely as a demurrer the court may interfere at Section 8
or 11 stage when it is manifestly and ex facie certain that the
arbitration agreement is non-existent, 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
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to affirm and uphold integrity and efficacy of arbitration as an
alternative dispute resolution mechanism.
155. Reference is, accordingly, answered.
18. Ramana, J. in a separate concurring opinion, after referring to
the case law, summed up his conclusions as follows:
244. Before we part, the conclusions reached, with respect to
Question 1, are:
244.1. Sections 8 and 11 of the Act have the same ambit with
respect to judicial interference.
244.2. Usually, subject-matter arbitrability cannot be decided at
the stage of Section 8 or 11 of the Act, unless it is a clear case of
deadwood.
244.3. 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
non-existence of valid arbitration agreement, by summarily
portraying a strong case that he is entitled to such a finding.
244.4. 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”.
244.5. The scope of the court to examine the prima facie validity
of an arbitration agreement includes only:
244.5.1. Whether the arbitration agreement was in writing? or
244.5.2. Whether the arbitration agreement was contained in
exchange of letters, telecommunication, etc.?
244.5.3. Whether the core contractual ingredients qua the
arbitration agreement were fulfilled?
244.5.4. On
rare occasions, whether the subject-matter of dispute
is arbitrable?
19. The 246th Law Commission Report not only discussed the
changes that are to be made bearing in mind the difficulties that arose
earlier, but also provided for amendments that were to be made to
Sections 8 and 11. This was provided as follows:
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“Amendment of Section 8
5. In section 8 of the Act,
(i) In sub-section (1), after the words “substance of the dispute,
refer” add “to arbitration, such of” and after the words “the parties
to” add “the action who are parties to the” and after the word
“arbitration” add the word “agreement”.
(ii) after sub-section (1), add “Provided that no such reference
shall be made only in cases where –
(i) the parties to the action who are not parties to the arbitration
agreement, are necessary parties to the action;
(ii) the judicial authority finds that the arbitration agreement
does not exist or is null and void.
Explanation 1: If the judicial authority is prima facie satisfied about
the existence of an arbitration agreement, it shall refer the parties
to arbitration and leave the final determination of the existence of
the arbitration agreement to the arbitral tribunal in accordance
with section 16, which shall decide the same as a preliminary
issue;
Explanation 2: Any pleading filed in relation to any interim
application which has been filed before the judicial authority shall
not be treated to be a statement on the substance of the dispute
for the purpose of this section.”
[NOTE: The words “such of the parties… to the arbitration
agreement” and proviso (i) of the amendment have been proposed
in the context of the decision of the Supreme Court in Sukanya
Holdings Pvt. Ltd. v. Jayesh H. Pandya and Anr., (2003) 5
SCC 531, – in
cases where all the parties to the dispute are not
parties to the arbitration agreement, the reference is to be rejected
only where such parties are necessary parties to the action – and
not if they are only proper parties, or are otherwise legal strangers
to the action and have been added only to circumvent the arbitration
agreement. Proviso (ii) of the amendment contemplates a two-
step process to be adopted by a judicial authority when considering
an application seeking the reference of a pending action to
arbitration. The amendment envisages that the judicial authority
shall not refer the parties to arbitration only if it finds that there
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does not exist an arbitration agreement or that it is null and void.
If the judicial authority is of the opinion that prima facie the
arbitration agreement exists, then it shall refer the dispute to
arbitration, and leave the existence of the arbitration agreement
to be finally determined by the arbitral tribunal. However, if the
judicial authority concludes that the agreement does not exist, then
the conclusion will be 44 final and not prima facie. The amendment
also envisages that there shall be a conclusive determination as to
whether the arbitration agreement is null and void.]”
(iii) In sub-section (2), after the words “duly certified copy thereof”
add “or a copy accompanied by an affidavit calling upon the other
party to produce the original arbitration agreement or duly certified
copy thereof in a circumstance where the original arbitration
agreement or duly certified copy is retained only by the other
party.”
xxx
Amendment of Section 11
7. In section 11,
(i) In sub-section (4), sub-clause (b), after the words “by the”
delete “Chief Justice” and add words “High Court” and after the
words “designated by” delete the word “him” and add the word
“it”.
(ii) In sub-section (5), after the words “by the” delete “Chief
Justice” and add words “High Court” and after the words
“designated by” delete the word “him” and add the word “it”.
(iii) In sub-section (6), sub-clause (c), after the words “may request
the” delete “Chief Justice” and add words “High
Court” and after
the words “designated by” delete the word “him” and add the
word “it”.
(iv) after sub-section (6), insert sub-section “(6A) An appointment
by the High Court or the person or institution designated by it
under sub-section (4) or sub-section (5) or sub-section (6) shall
not be made only if the High Court finds that the arbitration
agreement does not exist or is null and void,
Explanation 1: If the High Court is prima facie satisfied regarding
the existence of an arbitration agreement, it shall refer the parties
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to arbitration and leave the final determination of the existence of
the arbitration agreement to the arbitral tribunal in accordance
with section 16, which shall decide the same as a preliminary
issue.
Explanation 2: For the removal of any doubt, it is clarified that
reference by the High Court to any person or institution designated
by it shall not be regarded as a delegation of judicial power.
Explanation 3: The High Court may take steps to encourage the
parties to refer the disputes to institutionalised arbitration by a
professional Indian or International Arbitral Institute.
[NOTE: The proposed section 11 (6A) envisages the same process
of determination as is reflected in the proposed amendment to
section 8. Explanation 2 envisages that reference by the High
Court to any person or institution designated by it shall not be
regarded as a delegation of judicial power. Explanation 3 has been
inserted with the hope and expectation that High Courts would
encourage the parties to refer the disputes to institutionalize
arbitration by a professional Indian or international arbitral institute.]
(v) In sub-section (7), after the words “or sub-section (6)” add
the words “or subsection (6A)” and after the words “to the” delete
the words “Chief Justice or the” and add the words “High Court
is final where an arbitral tribunal has been appointed or a” and
after the words “person or institution” add the words “has been”
and
after the words “designated by” delete the words “him is
final” and insert the words “the High Court, and no appeal,
including letters patent appeal, shall lie against such order.”
[NOTE: This amendment ensures that
a) an affirmative judicial finding regarding the existence of the
arbitration agreement; and (b) the administrative act of appointing
the arbitrator are final and non-appealabe.]
Section 37, which is the appeal provision, was also sought to be
amended as follows:
Amendment of Section 37
20. In section 37,
(i) In sub-section (1), renumber sub-clause “(a)” as sub-clause
“(b)” and insert sub-clause “(a)refusing to refer the parties to
arbitration under section 8;”
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(ii) In sub-section (1), renumber sub-clause “(b)” as sub-clause
“(d)” and insert sub-clause “(c) refusing to appoint an arbitrator
or refusing to refer such appointment to a person or institution
designated by it under section 11, in the case of an arbitration
other than an international commercial arbitration”.
[NOTE: Sub-sections (a) and (c) have been added to provide for
appeal in cases of orders refusing to refer parties to arbitration
under section 8 (mirroring the existing provision in section 50) and
to provide an appeal where the High Court refuses to appoint an
arbitrator respectively.]
(iii) In sub-section (3), after the words “No second appeal” add
the words “, including letters patent appeal,”
[NOTE: This amendment is clarificatory and reduces the scope
of the party to file an LPA.]
20. It will be seen that when Parliament enacted the 2015
amendment pursuant to the Law Commission Report, it followed the
Scheme of the Law Commission’s Report qua Section 8 and Section 37
by enacting the words “….. unless it finds that prima facie no valid
arbitration agreement exists……” in Section 8(1) and the insertion of
sub-clause (a) in Section 37(1) providing an appeal in an order made
under Section 8, which refuses to refer parties to arbitration. However,
so far as Section 11(6) and Section 11(6A) are concerned, what was
recommended by the Law Commission was not incorporated. Section
11(6A) merely confines examination of the Court to the existence of an
arbitration agreement. Section 11(7) was retained, by which no appeal
could be filed under an order made under Section 11(6) read with Section
11(6A), whether the Court’s determination led to a finding that the
arbitration agreement existed or did not exist on the facts of a given
case. Concomitantly, no amendment was made to Section 37(1), as
recommended by the Law Commission.
21. However, by a process of judicial interpretation, Vidya Drolia
(supra) has now read the “prima facie test” into Section 11(6A) so as to
bring the provisions of Sections 8(1) and 11(6) r/w 11(6A) on par.
Considering that Section 11(7) and Section 37 have not been amended,
an anomaly thus arises. Whereas in cases decided under Section 8, a
refusal to refer parties to arbitration is appealable under Section 37(1)(a),
a similar refusal to refer parties to arbitration under Section 11(6) read
with Sections 6(A) and 7 is not appealable. In the light of what has been
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decided in Vidya Drolia (supra), Parliament may need to have a re-look
at Section 11(7) and Section 37 so that orders made under Sections 8
and 11 are brought on par qua appealability as well.
22. We now come to the facts of the present case. It is first
important to set out the CFSL report dated 29th September, 2019, in
which the CFSL found:
“Result of Examination:
It has not been possible to express any opinion regarding the
authorship of questioned signatures marked A-1 to A-6 in
comparison with the standard signatures marked A-1 to A-11 and
S-1 to S-16 attributed to M.G. Stephen, due to the reason that the
model of both the sets of signatures are different, hence, technically
not comparable.”
23. Since, the CFSL did not express an opinion either way, it became
incumbent upon the learned Single Judge to determine as to whether the
Agreement dated 7th July, 2014 could have been entered into given the
surrounding circumstances of the case. As Shri Divan rightly points out,
there are no negotiations which lead upto the 7th July, 2014 Agreement
that are on record. Secondly, negotiations that take place only after 7th
July, 2014 in which a draft agreement is deliberated upon between the
same parties. It would stretch incredulity to state that on the same subject
matter negotiations and a draft agreement would be spoken about after
a final signed agreement has been agreed upon between the parties.
Secondly, he rightly
points out that the Agreement is notarized in
Faridabad, Haryana, with no explanation worth the name when a contract
is to be executed in Bihar by one of the parties whose registered office
is in Bihar and the other party whose registered office is in Mumbai.
Thirdly, the Notary who is said to have notarized the Agreement was not
licensed to do so the same, his license having expired earlier, a fact that
is accepted even by the Respondents.
24. Even otherwise, some of the learned Single Judge’s conclusions
are plainly incorrect and against the record. The learned Single Judge
holds:
“39. ….. Admittedly on 22.09.2014, LOI was awarded to the
respondent and on the petitioner raising an invoice for Rs.25 Lakhs
on 27.09.2014, respondent actually made payment on 29.09.2014.
Counsel for the petitioner has also shown the email dated
27.09.2014 whereby the respondent had asked the petitioner to
raise the invoice on its letter head…..”
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25. This is plainly incorrect in view of the correspondence and
pleadings between the parties, as an invoice was raised on Process,
Process making payment on 29th September, 2014 and not the Appellant.
Equally, the finding that a draft Consultancy Agreement was sent on
15th July, 2014 containing an arbitration clause, parties being ad idem
regarding submission of the disputes to arbitration is also plainly incorrect
in view of the fact that on the same day, an email was sent back in
which various terms were disputed, there being no concluded contract
between the parties. Also, the finding that Process was a sub-contractor
of the Respondent, is contrary to the pleadings between the parties which,
as we have seen, had ranged from Process being a joint venture partner
of the Appellant to Process having common Directors with the Appellant,
and to Process thereafter being described as the lead partner. Sub-
contractor-ship is not pleaded at all by the Respondent, the aforesaid
arising only from written submissions made before the learned Single
Judge.
26. The allegation that the Consultancy Agreement of 7th July,
2014 had a signature that may not be that of Mr. M.G. Stephen was
brushed aside stating that an arbitration agreement need not be signed
by the parties. That is entirely besides the point. Mr. M.G. Stephen has
sworn to an affidavit filed before the High Court that the signatures
appearing on the 7th July, 2014 agreement are not his signatures, as a
result of which the Appellant cannot be said to have entered into an
agreement at all on 7th July, 2014. Again, in paragraph 45, the learned
Single Judge’s finding that there exists an arbitration agreement between
the parties as contained in the “draft agreement” exchanged by email
dated 7th July, 2014, is incorrect for two reasons. The draft agreement
sent by email was exchanged on 15th July, 2014 and not on 7th July, 2014.
Secondly, the email in reply to the email of 15th July, 2014 shows that
there was no concluded contract between the parties. Also, the pleading
with which the parties went to Court was that there was a concluded
contract between the parties on 7th July, 2014. There was no pleading
worthy of the name that on 15th July, 2014, a draft agreement was
exchanged between the parties, as a result of which a concluded contract
emanated therefrom.
27. The facts of this case remind one of Alice in Wonderland. In
Chapter II of Lewis Caroll’s classic, after little Alice had gone down the
Rabbit hole, she exclaims “Curiouser and curiouser!” and Lewis Caroll
states “(she was so much surprised, that for the moment she quite forgot
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how to speak good English)”. This is a case which eminently cries for
the truth to out between the parties through documentary evidence and
cross-examination. Large pieces of the jigsaw puzzle that forms the
documentary evidence between the parties in this case remained unfilled.
The emails dated 22nd July, 2014 and 25th July, 2014 produced here for
the first time as well as certain correspondence between SBPDCL and
the Respondent do show that there is some dealing between the Appellant
and the Respondent qua a tender floated by SBPDCL, but that is not
sufficient to conclude that there is a concluded contract between the
parties, which contains an arbitration clause. Given the inconclusive nature
of the finding by CFSL together with the signing of the agreement in
Haryana by parties whose registered offices are at Bombay and Bihar
qua works to be executed in Bihar; given the fact that the Notary who
signed the agreement was not authorised to do so and various other
conundrums that arise on the facts of this case, it is unsafe to conclude,
one way or the other, that an arbitration agreement exists between the
parties. The prima facie review spoken of in Vidya Dhrolia (supra) can
lead to only one conclusion on the facts of this case - that a deeper
consideration of whether an arbitration agreement exists between the
parties must be left to an Arbitrator who is to examine the documentary
evidence produced before him in
detail after witnesses are cross-examined
on the same. For all these reasons, we set aside the impugned judgment
of the Delhi High Court in so far as it conclusively finds that there is an
Arbitration Agreement between the parties. However, we uphold the
ultimate order appointing Justice G.S. Sistani, a retired Delhi High Court
Judge as a Sole Arbitrator. The learned Judge will first determine as a
preliminary issue as to whether an Arbitration Agreement exists between
the parties, and go on to decide the merits of the case only if it is first
found that such an agreement exists. It is clarified that all issues will be
decided without being influenced by the observations made by this court
which are only prima facie in nature. The appeal is allowed in the
aforesaid terms.
Divya Pandey
Appeal partly allowed.