Introduction
The roots of arbitration are deep sown in what is known as 'party autonomy' or freedom of the parties to choose – whether it is terms of the governing arbitration agreement or the law that will govern the substance of the dispute or the procedure that the parties want to adopt to facilitate the dispute resolution. However, meandering through its interpretation – from a constricted approach to ultimately the expansion of scope of such 'autonomy' - is subjected to the ultimate restriction of the Constitution of India, the "grundnorm" or - as propounded by Hans Kelsen, jurist and philosopher - the basic norm which is at the absolute top of the pyramid to which all other laws present at different levels must abide by.
Section 11 of the Arbitration and Conciliation Act, 1996 ("the Act") provides for the appointment of arbitrators. While any violation of the conditions to be considered for an appointment under Section 11 of the Act would render such appointment invalid, the appointment is further subjected to a higher restriction of the law of the land, i.e., the Constitution of India which holds the chief pedestal even during the interpretation of 'specific' statutes such as the Act.
Section 11 of the Act: an ever-dynamic scope
Section 11 of the Act has been subjected to numerous amendments and judicial interpretations. While Konkan Railway Corporation Ltd vs Rani Construction Pvt Ltd [2000 (8) SCC 159] attempted to restrict judicial involvement at a pre-referral stage when parties approached the Court under Section 11 of the Act, the same was soon overruled by SBP & Co. vs. Patel Engineering Ltd., (2005) 8 SCC 618 and Boghra Polyfab vs. National Insurance Company Limited [AIR 2009 SC 170], leading to Section 11 (6-A) of the Act being contemplated in the 246th Law Commission Report and introduced vide the Arbitration and Conciliation (Amendment) Act, 2015. Section 11(6) of the Act mandates a prima facie scrutiny of the existence of an arbitration agreement and does not include a laborious enquiry of any sort. As elucidated by the Hon'ble Supreme Court of India in Duro Felguera, SA v. Gangavaram Port [(2017) 9 SCC 729], it "is limited to examining whether an arbitration agreement exists between the parties – nothing more, nothing less." As such, it is a limited jurisdiction that was contemplated in consonance with the tone in Section 5 of the Act – "Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part." Such a limited dive for details at a pre-reference stage was however, subjected to chiseling of the water-tight conclusion by the Hon'ble Supreme Court in United India Assurance Company Limited vs Hyundai Engg. & Construction Co. Ltd, [(2018) 17 SCC 607], re-opening the floodgate for interpretation.
Amidst the flickering interpretations, the Arbitration and Conciliation (Amendment) Act, 2019 sought to remove Section 11(6-A) of the Act. Though such a legislative step was in consonance with the then prevailing and accepted interpretation, its implementation is yet to be notified. Thus, Section 11 (6) of the Act still remains in the Act and as observed in Vidya Drolia vs. Durga Trading Corporation, [(2021) 2 SCC 1], even post the deletion of Section 11 (6-A) of the Act, the reason behind its inclusion still continues to be the guiding light. However, Drolia (Supra) had overlooked the fact that although Section 11 (6-A) was deleted, it is yet to be notified. Such interpretation/ step is furthered in Shree Vishnu Constructions v. The Engineer in Chief, Military Engineering Service, [2023 SCC OnLine SC 600] where a direction has been passed by the Hon'ble Supreme Court to decide and dispose of appointment of arbitrators within 6 months of such application. Such a time bound approach swims to only a prima facie satisfaction of existence of arbitration agreement.
Grundnorm: The ultimate restriction to Section 11 of the Act
While Section 11 of the Act, as fortified by judicial interventions, contemplate 'party autonomy' to be the soul of arbitration, the ultimate restriction is imposed by the "operation of law" which is the Grundnorm, i.e, the Constitution of India. 'Party autonomy' cannot be stretched to include within its garb a consent against law or a waiver of fundamental rights. In Lombardi Engineering Limited vs. Uttarakhand Jal Vidyut Nigam Limited [(2024) 4 SCC 341], an application under Section 11(6) of the Act was under consideration where the very constitutionality of the arbitration clause was challenged on the ground that a pre-deposit of 7 per cent of claim amount prior to the commencement of arbitration was arbitrary and violative of Article 14 of the Constitution of India. The Supreme Court, placing reliance on settled position with respect to 'party autonomy' and Kelsen's 'Pure Theory of Law' observed that the clause was not in the nature of a security deposit and was, as such, arbitrary and violative of Article 14 of the Constitution of India.
In this case, the Lombardi and Uttarakhand Project Development and Construction Corporation Limited ("UPDCC") had entered into a contract for providing consultancy services and for the preparation of a modified, comprehensive and bankable Detailed Project Report of the Arakot Tiuni Hydro Electric Project on Pabbar river in Uttarkashi, Uttarakhand. Clause 53 read with Clause 55 of the General Clause of Contract mandated pre-deposit of 7 per cent of the claimed amount prior to arbitration, if any was sought to be initiated for financial loss due to the abandonment of contract. Since a notice invoking arbitration was not responded to, an application under Section 11(6) of the Act came to be filed.
Although the issues under consideration were varied, the instant article is restricted to party autonomy vis-a-vis the violation of the 'Grundnorm.' On this aspect, the question before the Court was, "Whether Court while deciding a petition under Section 11 (6) of the 1996 Act for appointment of a sole arbitrator can hold that the condition of pre-deposit stipulated in the arbitration clause as provided in the Contract is violative of Article 14 of the Constitution being manifestly arbitrary?"
The 'Grundnorm' Restriction
The 7 per cent pre-deposit criteria was concluded to be arbitrary and violative of Article 14 of the Constitution – the clause was open ended and did not deal with the ultimate fate of the deposit. Reliance on SK Jain vs State of Haryana & Anr [(2009) 4 SCC 357] and ICOMM Tele Limited vs Punjab State Water Supply and Sewerage Board and Anr [(2019) 4 SCC 401] were misplaced since the clauses therein provided a refund/ adjustment scheme for the amount.
Validity or reasonableness of the pre-deposit criteria stipulated in the arbitration clause was pitched against Article 14 of the Constitution, relying on TRF Limited v. Energo Engineering Projects Limited [(2017) 8 SCC 377] and Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited [(2017) 4 SCC 665] to explain the phrase 'operation of law' - a phrase with a wider connotation covering the Act, the Constitution of India and any other Central or State law. The Court relied on Kelson's Pure Theory of Law and the pyramidical structure of hierarchy based on the basic norm of grundnorm - that the system of norms proceeds from downwards to upwards and finally closes at grundnorm, the Constitution being the paramount source of law in our country and all other laws being in conformity with the provisions of the Constitution.
Reliance was also placed on previous decisions of the Court including in HS Kulshrestha vs. Union of India [1999 SCC OnLine All 270] where the Court held that the highest law is known as the grundnorm and the Constitution is the grundnorm in our country. In State of AP vs. P. Laxmi Devi [(2008) 4 SCC 720] the Court held that if a legal norm in a higher layer of the hierarchy conflicts with a legal norm in a lower layer, the former will prevail. Thus, in the context of applicability of Kelsen's Theory of Law to arbitration, the Court accepted the following hierarchy: first, Constitution; second, the Act; third, arbitration agreement entered into between the parties. The concept of party autonomy can thus, not be stretched to an extent where it violates the fundamental rights provided for under the Constitution.
Conclusion
The decision in Lombardi(Supra) may seem to be a bye-pass to the direction of Duro (Supra) where the guiding light was only to see for 'existence' of arbitration clause and not check 'validity' of it and as reconfirmed by In Re: Interplay between Arbitration Agreements under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899, (2024) 6 SCC 1 – thus going against the legislative intention of minimum Court intervention. However, the Court has proceeded to further clarify the position that Constitution is the highest form of legal authority and the arbitration agreement must not fall foul of the rights granted thereunder. Thus, any agreement or legislative action must primarily adhere to the Constitution and thereafter also to the other authorities placed as per the hierarchical structure. This may not exactly be a limit to party autonomy, but the imposition of the theory and the Court's decisions clarify that party autonomy can also be subjected to certain restrictions, and agreements which violate fundamental legal principles may be held to be invalid.
Originally published by Bar & Bench
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