Time to re-think scope of appeal in arbitral appointments
Recently, the Supreme Court in Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engineering Pvt. Ltd. (“Pravin Electricals”),1 noted that Parliament may need to have a re-look at Section 11(7) and Section 37 of the Arbitration and Conciliation Act, 1996 (“Act”) so that orders made under Section 8 and 11 are brought at par with respect to their appealability.
Before we delve into the facts and analysis in the present ruling, we have discussed the scope of provisions relating to ‘reference to arbitration’ and ‘appointment of arbitrators’ and the ‘scope of appealable orders’ under the Act.
The appeal before the Supreme Court arose from a Delhi High Court (“High Court”) order on appointment of an Arbitrator under Section 11(6) of the Act to adjudicate disputes between the parties regarding payment obligations. The High Court, relying on the documentation placed on record, concluded that an arbitration agreement existed and referred the parties to arbitration for adjudication of the dispute. The High Court appointed a Sole Arbitrator. On appeal, the Supreme Court was faced with the issue on whether an arbitration agreement, in fact, existed.
Supreme Court Ruling and Analysis:
The Supreme Court inferred that it cannot render a conclusive finding to the effect that there exists an arbitration agreement between the parties as, amongst other reasons:
The Supreme Court noted that the issue of existence of an arbitration agreement would involve the examination of documentary evidence and witness testimony. Since the proceedings under Section 11 of the Act are summary in nature, questions on the existence of an arbitration agreement cannot be examined solely from a factual perspective.
The Supreme Court set aside the order of the High Court to the extent it found the existence of an arbitration agreement between the parties. However, the Supreme Court upheld the appointment of the arbitrator by the High Court. The Supreme Court left the question of existence of the arbitration agreement to be determined by the arbitrator as a preliminary issue. Further, it directed that the arbitrator would go ahead with the merits of the case only if it was found that an arbitration agreement exists between the parties.
Such a direction is in consonance with the Indian judiciary’s pro-arbitration approach. At the same time, it also ensures that where the existence of an agreement is dealt with as a preliminary issue, the parties are not subjected to the rigor of the entire arbitration proceedings, until and unless there is a clear finding on the existence of an arbitration agreement.
Separately, the Supreme Court noted that as a result of the judgment in Vidya Drolia, Section 8(1) and Section 11(6) of the Act have been brought at par with regards to the scope of determination of the validity / existence of the arbitration agreement. The Supreme Court inferred that an anomaly has arisen as a result of the parity between the scope of Section 8 and 11 coupled with existing incongruity in their appealability under the Act.
An application under Section 8 of the Act is subject to a prima facie determination of the validity of the arbitration agreement. A prima facie determination of the validity of the arbitration agreement would entail a consideration of the factors laid down in Vidya Drolia. In light of the above, the Supreme Court noted that parliament may need to re-look at the relevant provisions so that orders made under Sections 8 and 11 are brought on par qua appealability.
– Adimesh Lochan, Payel Chatterjee & Sahil Kanuga
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1 Civil Appeal No. 825 of 2021.
2 Section 8, Power to refer parties to arbitration where there is an arbitration agreement - Arbitration and Conciliation Act, 1996
(1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, 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.
3 Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1.
4 Section 11 (4), Appointment of arbitrators - Arbitration and Conciliation Act, 1996.
5 Section 11 (6A), Arbitration and Conciliation Act, 1996
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.
6 ¶ 92, Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1.