Column: Mayavati Trading - Back to where the Law should be, But...

Bar & Bench September 21 2019

Anirudh Krishnan, Hitesh Singhvi and Pranay Prakash

Introduction

This article traces the march of law pertaining to the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”) from the year 2000 to the recent judgement of the Supreme Court in M/s Mayavti Trading Pvt. Ltd. v. Pradyuat Deb Burman (“Mayavti Trading”) in Civil Appeal No. 7023 of 2019.

Power under section 11 of the Act - Administrative or Judicial

The march of law begins with the Supreme Court, in Konkan Railways v. Mehul Construction, (“Mehul Construction”) (2000) 7 SCC 201 and in Konkan Railways v. Rani Construction (P) Ltd., (“Rani Construction”) (2002) 2 SCC 388, holding that the Chief-Justice’s power of appointment under Section 11 of the Act was administrative in nature. This position came to be overruled in SBP v. Patel Engineering Ltd. (“Patel Engineering”), (2005) 8 SCC 618, where a 7-judge bench of the Supreme Court held that the power of the Chief Justice/ his designates to appoint an arbitrator under Section 11 of the Act is judicial rather than an administrative function. The consequence of the same was firstly that the remedy against an Order of appointment was only a Special Leave Petition (“SLP”) under Article 136 of the Constitution of India, 1950 and not a Writ Petition and secondly, that the Court is conferred with the power to decide on certain preliminary issues, including the existence of a valid arbitration agreement, whether the claim is a live claim etc. The test as to what aspects could be gone into in Section 11 determination was left rather open-ended. Further, there was obiter dicta to suggest that the test under Sections 8, 9 and 11 of the Act are essentially the same (See Paragraphs 16 and 19). It is also pertinent to note that there are observations in Patel Engineering which suggest that in order to make a finding under Section 11, the Chief Justice/his designates can look into affidavit evidence. 

Subsequently, the Supreme Court in National Insurance vs. Boghara Polyfab, (“Boghara Polyfab”) (2009) 1 SCC 267, further clarified the decision in Patel Engineering. The Supreme Court, set out three different categories of preliminary issues that may arise for consideration under Section 11 of the Act- (i) issues which the Chief Justice/ his designates are bound to decide; (ii) issues which the Chief Justice/ his designates may choose to decide; (iii) issues which ought to be left to the arbitral tribunal to decide. Importantly, the Hon’ble Court held that issues pertaining to excepted matters would fall under category (iii) and therefore ought to be left to the decision of the arbitrator. However, the issue pertaining to conclusion of the contract by recording satisfaction of their mutual rights and obligations or acceptance of final payment without objection would fall under category (ii) and in that event, the Court may choose to decide the said issue at the stage of appointing an arbitrator under Section 11 of the Act itself. 

Power under Section 11 of the Act Does not Extend to Deciding on Arbitrability

In the next significant judgement on the issue, the Supreme Court in Booz Allen and Hamilton Inc. vs. SBI Home Finance Ltd., (“Booz Allen”) (2011) 5 SCC 532 specifically drew a distinction between its powers under Section 8 and Section 11. The Court held that the Chief Justice/ his designates, in an application under Section 11 of the Act cannot decide on the issue of arbitrability of the referred disputes which should be left to the determination of the tribunal. However, in the case of Courts exercising power under Section 8 of the Act, all aspects of arbitrability of the dispute sought to be referred to arbitration would be decided by the court seized of the suit. These observatios, albeit in the nature of obiter dicta were of significant importance. 

Though detailed reasons were not set out for the above conclusion, the conclusion is justified in light of specific words contained in Section 8 which are absent in Section 11. Section 8 specifically mentions the following phrase, “an action is brought in a matter which the subject of an arbitration agreement...”. It necessarily therefore follows that if a subject is not capable of being subject matter of an arbitration, an application under Section 8 would have to be rejected. Similar words, “the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force” is also found in Section 34(2)(b)(i). This makes it clear that wherever the Legislature intended that arbitrability be gone into by a court of law, specific words were included in the said provision. Further, another distinguishing factor between applications under Section 8 and Section 11 is that when an application under Section 8 is allowed, the civil court’s jurisdiction is excluded. It is settled law that such an exclusion of civil court’s jurisdiction must not be easily presumed. Consequently, since parties are being divested of their right to maintain a civil suit, the threshold will necessarily have to be higher. 

The above conclusion was affirmed by the Supreme Court in Arasmeta Captive Power v. Lafarge India Pvt Ltd, (2013) 15 SCC 414. However, these conclusions, though backed by justifiable reasons, are contrary to the obiter dicta set out in Patel Engineering referred to above. This apparent contradiction needed to be clarified and this clarification came in the form of the Arbitration and Conciliation (Amendment) Act, 2015. (“Amendment Act, 2015”).

Arbitration and Conciliation (Amendment) Act 2015

With a view to reducing judicial intervention in an application under Section 11 of the Act, the 246th Law Commission Report recommended that the power of the Court be limited only to a prima facie consideration of the existence of a valid arbitration agreement. The said recommendation was accepted, though not fully [(the term prima facie was not incorporated in Section 11(6A)], and consequently Section 11(6A) was inserted by the Amendment Act, 2015 which clearly states that while appointing the arbitrator under this Section, the Court (as opposed to Chief-Justice/ designate) shall “..confine to the examination of existence of an arbitration agreement”. Hence, the classification as set out in Boghara Polyfab and the scope of interference under Section 11 as set out in Patel Engineering and Bogahara Polyfab stood legislatively overruled. To what extent such legislative overruling would operate is a matter of debate- this issue is discussed later on in this article.

Position after the Amendment Act, 2015

Following the amendment, the Division Bench of the Supreme Court in Duro Felguera v. Gangavaram Port Limited, (“Duro Felguera”) AIR 2017 SC 5070, where Section 11 (6A) of the Act was strictly applied and the Court limited its examination solely to the existence of a valid arbitration agreement. 

However, in Oriental Insurance v. Narbheram Power and Steel Private Limited, (“Oriental Insurance”) (2018) 6 SCC 534, a 3 judge bench of the Supreme Court following the decision in Vulcan Insurance v. Maharaj Singh, (1976) 1 SCC 943, dismissed an application under Section 11 of the Act after examining the arbitrability of the dispute. In doing so, the Court held that where a clause in a contract stipulates that under certain circumstances there can be no arbitration and the facts are demonstrably clear, then the controversy pertaining to the appointment of arbitrator has to be put to rest in such cases. 

Similarly, in United India Insurance v. Hyundai Engineering, (“Hyundai Engineering”) (2018) 17 SCC 607, a 3 judge bench of the Supreme Court while observing that Duro Felguera was not binding on a larger bench and further that Duro Felguera was distinguishable on the facts, in exercise of its powers under Section 11(6A) of the Act, examined the arbitrability of the dispute as well as whether the dispute fell within the ambit of an excepted matter by placing heavy reliance on the decision in Oriental Insurance. Ex facie, it appears that the Supreme Court decided the said issue contrary to the mandate of Section 11 (6-A) of the Act. This is discussed later on. 

Further, in United India Insurance v. Antique Art Exports (“Antique Arts”), (2019) 5 SCC 362, the Supreme Court, in a proceeding under Section 11 of the Act, distinguished the holding in Duro Felgura on the grounds that the same was a mere general observation about the effect of the amended provisions and that the said decision was distinguishable on the facts of the case. The Court held that the power under Section 11 upon the Chief Justice/ his designates is a judicial power and not an administrative function, therefore leaving some degree of judicial intervention. The Court went on to hold that when it comes to examining the prima facie existence of an arbitration agreement, it is always necessary to ensure that the dispute resolution process does not become unnecessarily protracted. On this basis, the Court, in a proceeding under Section 11 of the Act, analyzed the effect of the execution of a discharge voucher and the settlement of the contract by accord and satisfaction. Finding the claim to have been settled by accord and satisfaction, the Court held that there was no dispute under the agreement to be referred to an arbitrator for adjudication.

Then came, Mayavti Trading, where a 3-judge bench of the Supreme Court expressly overruled the judgement in Antique Arts and held that Court’s power in an Application under Section 11 is confined only to the examination of the existence of a valid arbitration agreement and the Court cannot decide on the arbitrability of a dispute. Moreover, the Court upheld the narrow construction of Section 11(6A) as adopted in Duro Felguera. 

Therefore, as on date, the position of law in this regard is covered by three judgements of 3-judge bench of Supreme Court - Hyundai Engineering and Oriental Insurance which propound a slightly wider interpretation of the powers of the Court and Mayavati Trading, which propounds a narrower approach. 

It is pertinent to note that Section 11(6A) of the Act has been omitted vide the Arbitration and Conciliation (Amendment) Act, 2019 (“Amendment Act, 2019”). The Supreme Court in Mayavti Trading addressed the implications of the said deletion of Section 11(6A). The Court held that Section 11(6A) was not deleted in order to resuscitate the law that was in place prior to the Amendment Act, 2015. However, such deletion was caused solely pursuant to the recommendations of the High-Level Committee Review regarding institutionalization of arbitrations in India, headed by Justice B. N. Srikrishna. Therefore, the amendment of Section 11 of the Act was suggested by the High-Level Committee with a view to enable the appointment of arbitrator(s) by arbitral institutions(s) appointed by the Supreme Court in case of international commercial arbitrations or by the High Courts in case of all other arbitrations. Such an amendment was suggested with a view to further reducing judicial interference in the appointment of arbitrators and also with a view to encouraging institutional arbitrations in India. 

Conclusion - Contradictions and Unanswered Questions

  1. The 246th Report of the Law Commission recommended that the scope for judicial intervention be restricted to situations where the Court finds that the arbitration agreement does not exist or is null and void. In so far as the nature of intervention was concerned, the Report recommended that where the prima facie satisfied against the argument challenging the arbitration agreement, it shall appoint the arbitrator and refer the parties to arbitration. However, the Legislature dropped the phrase “prima facie”. On the other hand, the Supreme Court in Patel Engineering held that the Chief Justice/his designates is required to decide whether the applicant has satisfied the conditions for appointment of an arbitrator under Section 11(6) of the Act or not and for the said purpose, the Court held that it may consider the affidavits and documents produced or take such evidence or get such evidence recorded as may be necessary (See Paragraph 39).

If the recommendation of the Law Commission would have been accepted by the legislature, then the prima facie threshold would have necessarily prevailed over the above finding of the Court in Patel Engineering. In view of the failure of the legislature to accept the said recommendation, does the finding in Patel Engineering continue to hold force? If so, is the scope of analysis under Section 11(6A) not so narrow after all?

  1. How are disputes pertaining to excepted matters to be classified? Conceptually, the Supreme Court in Booz Allen, Harsha Constructions v. Union of India, (2014) 9 SCC 246 and Hyundai Engneering have considered excepted matters as issues relating to arbitrability of the dispute. The Court in Oriental Insurance and Hyundai Engineering however have dealt with excepted matters as something which can be gone into in proceedings under Section 11 of the Act. Conceptually, if a dispute falls within the ambit of an “excepted matter” it would not fall within the ambit of the arbitration clause and hence it is possible to argue that notwithstanding the classification of such issues as issues pertaining to “arbitrability”, such disputes should fall within the ambit of Section 11(6A). Looked at from this angle, it may be possible to justify the decisions in Oriental Insurance and Hyundai Engineering, may be correct, though as a matter of policy, the consequences of these decisions are undesirable. 
  1. Disputes pertaining to the existence of accord and satisfaction, go to the very existence of an arbitration agreement. This is because, where there is accord and satisfaction, the arbitration clause itself perishes (see Boghara Polyfab). Therefore, today, if the existence of the arbitration agreement has to be gone into under Section 11, then it would necessarily follow that the Court will have to determine the question of whether accord and satisfaction has taken place or not. However, the Supreme Court in Mayavti Trading holds otherwise solely on the basis that the judgements in Boghara Polyfab and Patel Engineering stand legislatively overruled by the Amendment Act, 2015. However, it is pertinent to note that Mayavti Trading does not however examine the extent to which Boghara Polyfab and Patel Engineering stand overruled.

Since the ‘prima facie’ threshold recommended by the Law Commission has not been incorporated in Section 11(6A), such an examination will have to be by way of a detailed trial as held in Patel Engineering. It is also relevant to state that such a detailed trial will have to be completed within 60 days from the date of service of notice to the other party in compliance with Section 11(13) of the Act. 

The authors state that the position taken above do not take into account policy considerations. If policy considerations are taken into account, the position of law set out in Mayavati Trading and Duro are certainly desirable. 

[Note- The aforementioned issues however would be irrelevant under the Amendment Act, 2019 as once the arbitral institutions are recognized, the arbitrator(s) will be appointed by such arbitral institutions and the issues pertaining to the existence of the arbitration agreement will be decided by the arbitral tribunal under Section 16 of the Act.]

Hitesh Singhvi, Pranay Prakash, Anirudh Krishnan

About the Authors: Anirudh Krishnan, Hitesh Singhvi and Pranay Prakash are Managing Partner, Senior Associate and Associate of AK Law Chambers respectively. Anirudh is the Chief Editor of Justice RS Bachawat’s on “Law of Arbitration & Conciliation” (fifth and sixth edition) and was also a part of the special committee that was constituted by the Law Commission to draft the 246th Law Commission Report on the amendments to the Arbitration and Conciliation Act, 1996.