[The Viewpoint] Scope and Ambit of Judicial Scrutiny in Section 11 Application

The Apex Court of India in the matter of M/s. Emaar India Ltd. Vs. Tarun Aggarwal Projects LLP & Anr. set aside the judgment and order passed by the Delhi High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Act”) and observed that the High Court at Section 11 stage was at least required to hold a primary inquiry / review and prima facie come to a conclusion as to whether the dispute fell within the scope of the arbitration agreement and whether the same was arbitrable in nature.

Org. Petitioners and Respondent had executed a Collaboration Agreement and an addendum for development of a residential colony in Gurugram (“Collaboration Agreement”). As per Clause 36 of the Agreement, if any dispute fell under Clauses 3, 6 and 9 of the Collaboration Agreement, the aggrieved party had a right to get the Agreement enforced through appropriate court of law. Clause 37 was an arbitration clause, which covered matters other than Clause 36. Org. Petitioners alleged that the Appellant did not comply with the Collaboration Agreement and issued a notice raising a demand for the physical possession of plots and claimed a sum of Rs.10 crores towards damages. Org. Petitioners nominated their arbitrator. The Appellant refused to do so. The Org. Petitioners filed an application under Section 11(6) of the Act before Delhi High Court for the appointment of an arbitrator.

The Appellant opposed the application on the ground that the dispute fell under Clause 36 of the Collaboration Agreement. The Delhi High Court observed that conjoint reading of Clauses 36 and 37 makes it clear that a party does have a right to seek enforcement of the Collaboration Agreement before the court of law but it does not bar the settlement of disputes through arbitration and appointed arbitrators. Aggrieved by this judgment of the Delhi High Court, the Appellant preferred an appeal before the Apex Court. The moot question raised in the appeal before the Apex Court was, whether in an application under Section 11(5) and (6) of Act, an arbitrator can be appointed by the court without holding any preliminary inquiry as to whether the dispute is arbitrable or not?

The Apex Court placed reliance upon Vidya Drolia and Ors. Vs. Durga Trading Corporation; and Indian Oil Corporation Limited Vs. NCC Limited while allowing the appeal.

The Apex Court in the judgment of Vidya Drolia clarified that the court, with a view to prevent wastage of public and private resources, may conduct prima facie review at the stage of reference to weed out any frivolous or vexatious claims. In the said judgment, the Court observed that 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 Court considered Vidya Drolia, in the matter of Indian Oil Corporation and observed that at Section 11 stage, a preliminary inquiry is permissible if the dispute is raised with respect to the arbitrability.

Such judgments may raise concerns as to: -

(i) how could a court go into the merits of the case at the reference stage; (ii) arbitrator can adjudicate upon its own jurisdiction in a Section 16 application and that the courts should not usurp such powers; and

(iii) whether such a preliminary inquiry was mandatory or directory in nature.

The Apex Court in the matter of DLF Home Developers Ltd. Vs Rajapura Homes Private Limited & Anr. has analyzed the scope and ambit of judicial scrutiny in a Section 11 application and inter alia observed that the courts are not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen Arbitrator. On the contrary, the court(s) are obliged to apply their mind to the core preliminary issues, albeit, within the framework of Section 11(6-A) of the Act. Such a review, as already clarified by the Apex Court, is not intended to usurp the jurisdiction of the Arbitral Tribunal but is aimed at streamlining the process of arbitration. Therefore, even when an arbitration agreement exists, it would not prevent the court to decline a prayer for reference if the dispute in question does not correlate to the said agreement.

In light of the above analysis, the Apex Court observed that the Delhi High Court has not held any preliminary enquiry as to whether the dispute raised by the Org. Petitioner was arbitrable or not and whether it falls within the ambit of clause 36 or clause 37 of the Collaboration Agreement. As such, the Apex Court remitted the matter back to the Delhi High Court to hold a preliminary inquiry and decide the application.

As the Apex Court has observed in series of judgments that a restricted and limited review by the courts, before appointing an arbitrator, is a must to check and protect the parties from being forced to arbitrate, when the matter is “non-arbitrable” and “to cut of the deadwood”. While the amendments brought into the Act aims at minimum interference by courts in the arbitral proceedings, a preliminary inquiry in cases where it is manifest and ex facie certain that the arbitration agreement is non-existent, invalid or that the disputes are non-arbitrable, the courts are required to undertake a preliminary enquiry.

Disclaimer - This article is not meant to constitute legal advice and is only meant to create legal awareness.

Deepak Deshmukh is an Associate Partner, Nisha Kaba is a Senior Associate and Hrishikesh Nadkarni is an Associate at Naik Naik & Co.