Arbitration Act: A Section 11 Handbook for RespondentsFebruary 13 2019
This article is a round-up of all the arguments that a respondent can take to oppose the appointment of an arbitrator in a petition under Section 11 of the Arbitration and Conciliation Act, 1996.
Even though Section 11(6A), inserted by the 2015 Amendment, says that courts shall “confine to the examination of the existence of an arbitration agreement”, a fairly large number of categories of cases have evolved in which the Court has to look at more than merely the existence of an arbitration agreement. In practice, these can be used to successfully oppose a Section 11 petition, which is somewhat surprising (though welcome from a common sense point of view) given the certainty of the language of the provision.
1. One category consists of cases which by their very inherent nature, are incapable of arbitration, such as criminal offences, matrimonial disputes etc. It is this category which is covered by S.2(3) of the Arbitration Act.
Another example provided in para 26 of Emaar MGF Land Ltd v. Aftab Singh 2018 SCC OnLine SC 2771 is that, there may be a commercial agreement between two parties that all issues pertaining to a transaction are to be decided as per the arbitration clause in the agreement. In case a cheque is dishonoured by one party to the transaction, despite the arbitration agreement, the party aggrieved has to approach the criminal court.
These are mainly rights in rem, as explained in Booz Allen and Hamilton Inc. v. SBI Home Finance Limited and others, (2011) 5 SCC 532, which held that (at SCC p. 546, para 35)
“Adjudication of certain categories of proceedings is reserved by the legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not exclusively reserved for adjudication by courts and tribunals may, by necessary implication stand excluded from the purview of private fora…” and laid down 6 categories of non-arbitrable matters relating to rights in rem.
As held in Ayyasamy v. Paramasivam (2016) 10 SCC 386,
“In Vimal Kishor Shah v. Jayesh Dinesh Shah, (2016) 8 SCC 788, this Court added a seventh category of cases to the six non-arbitrable categories set out in Booz Allen, namely, disputes relating to trusts, trustees and beneficiaries arising out of a trust deed and the Trust Act.”
In Olympus Superstructures Pvt Ltd. v. Meena Vijay Khetan and Ors. 1999 (5) SCC 651, the Court held that an arbitrator has the power and jurisdiction to grant specific performance of contracts relating to immovable property. The Court further clarified that while matters like criminal offences and matrimonial disputes may not be subject matter of resolution by arbitration, matters incidental thereto may be referred to arbitration.
In Himangi Enterprises v. Kamaljeet Singh (2017) 10 SCC 706, the Court, relying on Booz Allen, held that landlord-tenant disputes are non-arbitrable even if the agreement so provides.
2. Another category consists of those cases which, by their nature, are amenable to arbitration, but which the Legislature has intended to keep non-arbitrable or at least not exclusively arbitrable. For example, consumer and telecom disputes. In consumer disputes, Section 3 of the Consumer Protection Act 1986 says that the remedy under the Act is in addition to and not in derogation of other remedies; therefore it can go on simultaneously.
However, in 2 recent judgments - (1) Emaar (supra) and (2) Rosedale Developers Private Limited Vs Aghore Bhattacharya And Others, (2018) 11 SCC 337, despite the amended Section 8(1) reading “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”, the Supreme Court has held that a Section 8 application is not maintainable once a consumer complaint has been filed.
There are, of course, innumerable judgments saying the same thing before the 2015 amendment and now, it is clear that even post-amendment, there is no change to this position.
3. Yet another category is those cases where the dispute between the parties obviously does not relate to the disputes covered by the arbitration clause. In this connection, note that the words “in a matter which is the subject of an arbitration agreement” are unchanged from the unamended Section 8, and therefore, the stress laid on the interpretation of these words in the Sukanya Holdings judgment will still apply when it says that
“15. …Therefore, the suit should be in respect of “a matter” which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, however, a suit is commenced — “as to a matter” which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8.”
Even in Duro Felguera, the Supreme Court held that:
“48. … it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.”
This was also the question framed and answered by the Supreme Court as Question No.2 at Para 34 of the Booz Allen judgment which follows Sukanya.
In a recent judgment being Brightstar Telecommunications India Ltd. v. Iworld Digital Solutions Pvt Ltd Arb P.662/2017 delivered on December 21, 2018 by the Delhi High Court, the dispute was admittedly in relation to trade in IPhones, whereas the arbitration clause related to Beetel landlines. In such a case, the Court held, it would be absurd to refer parties to arbitration since the dispute is “as to a matter” which is obviously outside the contemplation of the arbitral clause. This is a clear indication that subject matter of the dispute has to be seen vis-à-vis the arbitration clause, even if both are inherently arbitrable.
4. Yet another thing the Court has to see, is that the so-called arbitration agreement is really a valid and enforceable agreement in terms of S.7 of the Arbitration Act. For example in Vimal Shah v. Dinesh Shah (2016) 8 SCC 788 it was held that not only are disputes relating to a trust non-arbitrable by nature, but also the so-called arbitration clause in the Trust Deed, even though it definitely exists, is not a valid and enforceable agreement in terms of S.7 of the Arbitration Act since there is no element of agreement, offer and acceptance, meeting of minds or signature by both parties. A Trust Deed, like a Will, is only an expression of a wish by the settlor and is signed only by the settlor.
5. The application of these rules runs into practical difficulties when there are multiple parties as well as multiple contracts. Some contracts may have an arbitration clause while others do not, and some may have different sets of parties as signatories. In Indowind v. Wescare (2010) 5 SCC 306, a two-judge bench of the Supreme Court had said that a company which is not party to an arbitration agreement with the claimant cannot be made party to an arbitration, even if both companies have common Directors or shareholders since they have separate legal existence.
In Chloro Controls (2013) 1 SCC 641, a three-judge bench of the Supreme Court, in the author’s opinion, essentially overruled Indowind (supra), explaining and applying the concepts of “group of companies”, “composite contracts”, “commonality of purpose”, “direct relationship to the party”, intention to be bound and a mother agreement supported by ancillary agreements, to lay down certain circumstances in which a company not a party to an arbitration agreement could be subjected to arbitration. The Court also interpreted the expression “claiming through or under” appearing in S.45, which expression is now inserted in S.8 by the 2015 amendment.
In Cheran Properties Ltd. Kasturi and Sons Ltd 2018 SCC Online SC 431 also, the Supreme Court traces the entire history on the subject and applies the principles laid down in Chloro Controls and interpreted the expression “parties and persons claiming under them” appearing in S.35 in the same way as the expression in S.8 and 45, to say that this will cover a company which is a nominee of shares of another company which is a party to the mother agreement. English commentators such as Redfern and Hunter in their book have said that this is an acceptable deviation from the strict requirement of an agreement being in writing between two parties, embodied in S.7 of our Act.
In Duro Felguera, the case was held to stand on a different footing since there was no overarching mother agreement and all the five different packages as well as the corporate guarantee were independent contracts that did not depend on the terms and conditions of the original package nor on the memorandum of understanding executed between the parties.
In a recent judgment by the Bombay High Court in Neelkanth Mansions 2018 SCC Online Bom 5970, even though there were group companies, a mother agreement and a commonality of purpose, it was held that there was no intention of the affiliates to be bound, mainly because the mother agreement specifically provided that in order to be bound, the affiliate has to execute a Deed of Adherence, which admittedly had not been done. Therefore, even this is distinguishable on facts. This shows that, the principle which was enunciated in Chloro Controls and recently reiterated in Cheran Properties is still good law and the judgments in Duro and Neelkanth Mansions do not detract from it.
6. In Ameet Lalchand Shah Rishabh Enterprises 2018 SCC Online SC 487, the Court, applying the “business efficacy” principle of Ayyasamy, referred the parties to arbitration. This case turned on its own facts, and the author very humbly submits that it seems to be wrongly decided on those facts.
7. Jagdish Chander v Ramesh Chander (2007) 5 SCC 719 is another example of a so-called arbitration clause that was held not to be a binding arbitration clause. In that case, the clause said ‘if the parties so determine’ there would be a reference to arbitration, and therefore the Supreme Court held that the clause contemplated a further determination, rendering it non-mandatory.
Voltas Ltd v MP Entertainment 2016 SCC Online Bom 7664, a judgment by a single judge of the Bombay High Court rendered after the 2015 Amendment, reflects that this approach is still valid, though in the author’s humble opinion, it has wrongly applied the principle to the facts of that case. In Voltas, the clause provided “In case of any dispute during the execution of the work and if the matter is referred to Arbitration then it will be resolved by…” The single judge held, applying Jagdish Chander (supra), that this also is not a binding arbitration clause as it is an “optional” clause since parties may or may not refer to arbitration and at best it contemplates the possibility of parties agreeing to submit to arbitration.
This is clearly wrong, since in Voltas (supra), unlike Jagdish Chander, there was no prior determination required and the word “if” was indeed superfluous. In every arbitration clause, the word “if” has to be read in, as there is never any certainty that the parties will have disputes and that they will refer them to arbitration. The clause always provides the procedure only if those things happen.
8. If the arbitral clause itself provides for certain excepted matters or conditions for reference, those must be strictly construed. For example, in United India Insurance Company Ltd v. Hyudai Engineering 2018 SCC Online SC 1045, relying on Oriental Insurance v. Narbheram Power (2018) 6 SCC 534 the Court refused to refer the parties since liability was not admitted and the clause stated that only if liability was admitted, only then reference could be made to arbitration to decide the quantum.
Therefore, the trend of judicial pronouncements after the 2015 Amendment clearly shows that despite the strict language of Section 11(6A) commanding Courts to firmly affix blinkers to their eyes, at the end of the day, a common sense approach still has to be followed by Courts when deciding on whether to refer parties to arbitration. Whether or not this is what Parliament intended is anybody’s guess, but in the author’s opinion, it is a correct approach that will ultimately bring to fruition what parties must have intended and also avoid unnecessary litigation.
The author is an advocate of the Supreme Court of India.
Disclaimer: The views expressed in this article are of the author and Bar & Bench does not necessarily hold the same views. Bar & Bench does not take responsibility for the same.
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