India: Can Courts Decide The Arbitrability Of A Dispute While Appointing An Arbitrator?

The Hon'ble Supreme Court of India in two recent decisions i.e., Emaar India Ltd. v. Tarun Aggarwal Projects LLP & Anr.¹ (Emaar India Case) and VGP Marine Kingdom Pvt. Ltd. & Anr. v. Kay Ellen Arnold² (VGP Marine Kingdom Case) discussed the power of the Court to conduct a preliminary inquiry while dealing with an application for appointment of arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (Act).

Emaar India Ltd. v. Tarun Aggarwal Projects LLP & Anr., 2022 SCC OnLine 1328

In the Emaar India Case, the parties entered into an agreement for development of a residential colony. When disputes arose between the parties regarding alleged breach of contract, the parties were unable to appoint an arbitrator and hence approached the High Court for appointment. The High Court appointed an arbitrator and aggrieved by the said order, the appellants approached the Supreme Court.

Before the Apex Court, the appellant argued that the dispute resolution clause is divided into two parts, disputes which fall within the scope of Clause 36 shall be decided by the Court and are non-arbitrable whereas disputes which fall within the ambit of Clause 37 are arbitrable. It was contended that the current dispute is non arbitrable since it fell under Clause 36 and furthermore since this objection was raised before the High Court the same should have been considered by the Court before making its final ruling. On the other hand, the respondents submitted that the issue of arbitrability shall be decided by the Arbitrator himself and on a conjoint reading of Clauses 36 and 37 the dispute could have been referred to arbitration.

The bench of Justices M R Shah and Krishna Murari dealt with the issue if the High Court was justified in appointing an arbitrator in the Section 11 application without conducting a preliminary inquiry on whether the dispute is arbitrable or not.

The Court after considering Oriental Insurance³, Rajasthan State Industrial Development⁴, Harsha Construction⁵, Vidya Drolia⁶, culled out the following principles:

• An arbitration agreement must be construed strictly. If a clause stipulates that under certain circumstances, there can be no arbitration and the same is demonstrably clear then no arbitrator shall be appointed.
• The issue of arbitrability of issues is to be determined by the arbitrator unless, the Court is manifestly and ex facie certain that the agreement is non-existent, invalid or disputes are prima facie non-arbitrable.
• While interpreting Section 11 of the Act, the phrase "existence of arbitration agreement"⁷ would include every aspect of the validity of arbitration agreement, albeit the Court at reference stage would apply the prima facie test.

The Supreme Court observed that the reason for this is "to cut the deadwood and trim off 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."⁸

The Court applying the aforesaid principles held that the High Court while appointing an arbitrator can launch a preliminary inquiry to decide whether the dispute falls within the "excepted matters" category and further ruled that if it does fall under such category then no arbitration can be initiated for those disputes. Thus, in the present case the High Court should have determined the category in which the dispute falls since an objection regarding jurisdiction was raised by one of the parties and erred in appointing the arbitrator. The Supreme Court set aside the High Court order and remitted the matter back to the High Court for fresh consideration.

VGP Marine Kingdom Pvt. Ltd. & Anr. v. Kay Ellen Arnold, 2022 SCC OnLine SC 1517

The parties entered into three agreements and after disputes arose the matter was referred to arbitration and an award was passed deciding the issues. An important fact of note was that certain proceedings were also pending before the NCLT regarding alleged acts of oppression and mismanagement. A fresh dispute arose between the parties and arbitration was invoked again. The High Court refused to appoint an arbitrator observing that the disputes already stood covered under the arbitral award already rendered and pending NCLT proceedings.

The appellant appealed to the Supreme Court and contended that the fresh / current dispute arises out of a separate shareholders agreement and the NCLT proceedings have no impact on the fresh dispute. The Respondent pleaded that the agreements are inter-linked and in view of the earlier award the present dispute is not maintainable.

Same bench of the Hon'ble Supreme Court heard the parties and held that High Court ought to have appointed an arbitrator and left the issue of arbitrability of dispute for the arbitrator to decide since the current dispute is separate from the completed arbitral proceedings and pending NCLT proceedings. The Court appointed an arbitrator to determine the disputes further.

Thus, the Court reiterated its earlier position that while considering an application under Section 11 of the Act, the arbitrability of the dispute should be left to be decided by the arbitrator unless and until prima facie it can be determined that the dispute is non-arbitrable.

Conclusion

The Court in the three-judge bench decision of Vidya Drolia v. Durga Trading Corporation relying on the 246th Law Commission Report⁹ crystalized the law that issue of arbitrability can be raised at the referral stage (under Section 8 or 11), before the Tribunal (under Section 16) and lastly while challenging the award (under Section 34). For the referral stage, the Court laid down that a matter should be referred to arbitration if the validity of the agreement cannot be determined on a prima facie basis. Therefore, the rule for the Court is "when in doubt, do refer".¹⁰

The Court in Emaar India Case and VGP Marine Kingdom Case have followed suit and relying on the principles in the abovementioned cases (specifically Vidya Drolia) awarded relief to the aggrieved parties after following the principles of preliminary inquiry while adjudicating a Section 11 application.

The principles laid down by the Court in these cases, will further the motto of making India an arbitration friendly jurisdiction and promote the principle of minimal court intervention while dealing with contracts containing an arbitration agreement.

Footnotes

1 2022 SCC OnLine SC 1328, CA 6774/2022 as decided on 30 September 2022.

2 2022 SCC OnLine SC 1517, CA 6679/2022 as decided on 4 November 2022.

3 Oriental Insurance Co. Ltd. v. Narberam Power and Steel (P) Ltd. (2018) 6 SCC 534.

4 Rajasthan State Industrial Development and Investment Corporation v. Diamond and Gem Development Corporation Ltd. (2013) 5 SCC 470.

5 Harsha Construction v. Union of India (2014) 9 SCC 246.

6 Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1.

7 Section 11(6A): "(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."

8 Emaar India Case, Para 23.

9 Law Commission Report, Report No. 246 on Amendments to Arbitration and Conciliation Act, 1996, 5 August 2014.

10 Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1, Para 153.

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