Explore the impact of the Vidya Drolia judgment on the jurisdiction of arbitration tribunals in deciding the existence and validity of arbitration agreements. Understand the evolving landscape post the 2015 amendment and conflicting decisions shaping the scope of judicial intervention in pre-arbitral disputes.
Post Vidya Drolia Judgement – Whether or Not the Dispute Relating to the Existence of the Arbitration Agreement Should be Referred to the Arbitration Tribunal
Introduction
Competence, or Kompetenz, is a widely used principle in the field of arbitration that lets an arbitration tribunal decides on its own jurisdiction. Both the legislature and the judiciary had expressed a desire to apply this principle. Section 16 of the Arbitration and Conciliation Act, 1996, captures the essence of this principle. It establishes the arbitral tribunal’s authority to rule on its own jurisdiction, including the existence and validity of the arbitration agreement. Further, in a number of cases, the Courts emphasized the importance of the Kompentenz-Kompentenz principle and its applicability to Indian arbitration law.
Despite this, there has always been uncertainty about whether the existence and validity of an arbitration agreement should be dealt with by Courts or an Arbitration Tribunal at the pre-arbitral stage. Section 8 deals with the court’s power, before an action is brought in a matter that is the subject of an arbitration agreement, to refer the parties to arbitration unless it finds that, prima facie, no valid arbitration agreement exists. This section conflicts with Section 11 of the Act, which deals with the scope of powers exercised by a judicial authority while appointing an arbitrator after an application is filed. Section 11 undermined and violated the principle of competence-competence granting broad powers to judicial authority in deciding the matter. Therefore, based on the recommendations of the Law Commission in the 246th Report, an amendment to the Act came in 2015, under which Section 11(6A) was added, which limited the scope of court intervention and confined the court’s examination to the existence of an arbitration agreement on the application to appoint the arbitrators. However, Section 8, which deals with the court’s authority to refer parties to arbitration where an arbitral agreement exists, is in conflict. This section calls for an examination of the “prima facie” existence of an agreement, which is not the case under Section 11-6A, creating ambiguity. Even after the amendment, the issue has not been resolved, and questions such as what constitutes prima facie existence and to what extent courts can investigate the validity of an arbitration agreement during the pre-arbitral stage remain open. The government has yet to notify the 2019 amendment, which omitted section 11 6 A, leaving the issue unresolved.
Pre-2015 Amendment era
Prior to the 2015 amendment, there was considerable uncertainty about the scope of judicial intervention at the pre-arbitral stage. The Supreme Court in the case of SBP & Co. vs. Patel Engineering Ltd discussed the scope of application under Sections 8 and 11 and found them to be complimentary with each other. Further, it expanded the scope of courts and held that courts needed to look at factors such as whether the arbitration agreement existed. Whether the arbitration agreement is valid? Whether the party requesting under Section 11 is a party to the arbitration agreement? Whether the subject matter is arbitrable? while deciding whether or not to refer a matter to an arbitral tribunal under Section 11 of the Act.
Some other cases, like Booz Allen and Ayyaswamy, also interpreted Section 11 in a way that expanded the scope of judicial intervention without following the principle of kompetenz-kompetenz.
Post-2015 Amendment era
Based on the law Commission report, the 2015 amendment added section 11 6A to the act. This new provision restricted judicial intervention to the existence of an arbitration agreement. Section 11 was later interpreted in accordance with Section 8, and the courts emphasized the presence of a prima facie existence of arbitration agreement. However, the 2015 amendments still failed to resolve the issue and instead created ambiguity over sections 8 and 11. If the judicial authority determines that an arbitration agreement exists prima facie, it shall send the matter to arbitration and allow the arbitral tribunal to decide the validity and enforceability of the arbitration agreement. Yet, if the judicial authority determines that there is no arbitration agreement that determination will be final, and no further reference will be made.
Vidya Drolia Judgment – End to the debate?
Finally, the Vidya Drolia Judgement settled the debate over the scope of judicial intervention in a dispute over the existence and validity of an arbitration agreement at the pre-arbitral stage. In this case, the Supreme Court held that, when examining the relationship between sections 8 and 11(6A), they are complementary and have the same ambit in terms of judicial interference. Further, the Court discussed the need for prima facie review:
“89. Accordingly, when it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the arbitral tribunal selected by the parties by consent.
95. Accordingly, we hold that the expression ‘existence of an arbitration agreement’ in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the arbitral tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability”
In addition, the court held that pursuant to Sections 8 and 11, it must refer a dispute to arbitration or appoint an arbitrator, depending on the circumstances, unless a party has established a prima facie case of the non-existence of a valid arbitration agreement by conclusively demonstrating that he is entitled to such a finding. If the validity of the arbitration agreement cannot be determined on a prima facie basis, as outlined above, the court shall refer the case, i.e. “when in doubt, refer.”
The court’s authority to consider the prima facie validity of an arbitration agreement is limited to the following:
- Whether there be a written arbitration agreement? or
- Whether the arbitration agreement was contained in a letter exchange, telephone conversation, etc.
- Whether the essential elements of the arbitration agreement have been met?
- Sometimes, whether the dispute’s subject matter is arbitrable?
Post Vidya Drolia Judgment – Conflicting Decisions
There has been an attempt by the Supreme Court to bring uniformity to the issue pertaining to the dispute over the extent of interference by the judiciary in cases involving the existence and validity of arbitration agreements. The supreme court clarified in subsequent cases following the Vidya Drolia judgment, such as BSNL vs Nortel and DLF Home Developers Limited vs Rajpura Homes Private Limited & Anr., that courts in section 11 applications are not expected to act mechanically. It was further reaffirmed in the case of M/s Emaar India Ltd. vs. Tarun Aggrawal Projects LLP & Anr. that prima facie review is required to determine the scope of an arbitration agreement arbitrable by courts or tribunals.
Furthermore, in cases such as Janta Associates and Co. Ltd. vs. Indian Oil Foundation and Ors., where the petitioner requested that the dispute be referred to an arbitration tribunal, the court denied the request on the grounds that an excepted matter clause in an agreement between the parties excluded disputes regarding whether or not a claim is a notified claim from the scope of arbitration. In another case, Vikram Bakshi vs. Sonia Khosla & Anr., the Delhi High Court refused to hear a petition under Section 11 while observing that intra-company disputes are non-arbitrable.
In another case, IOCL, the Supreme Court broadened the scope of Section 11 by deciding whether the parties reached an agreement and satisfied their claims. Such adjudication would normally fall under the purview of disputed facts and should be referred to an arbitral tribunal.
Further, in Sanjiv Prakash vs. Seema Kukreja & Ors. (2021), the Supreme Court held that a Section 11 court would refer the matter to arbitration when contentions relating to non-arbitrability are plainly arguable or when the facts are contested. The Apex Court ruled that the Court cannot, at the stage of considering a Section 11 application, enter into a mini trial or an elaborate review of the facts and law that would usurp the jurisdiction of the arbitral tribunal.
Recently, in the case of Newton Engineering and Chemicals Ltd vs. UEM India Pvt. Ltd., the Delhi High Court, while acknowledging that the existence of the arbitration clause between the parties was not disputed, referred the parties to arbitration, noting that it has limited jurisdiction under Section 11 of the A&C Act.
Conclusion
The kompetenz principle has been well established and upheld by courts worldwide. It is one of the fundamental principles governing Indian arbitration law. Although the Vidya Drolia judgment discussed and promoted this principle, however, the prima facie test propounded in the aforementioned case runs contrary to the principle. Courts following this decision, frequently citing Vidya Drolia, are broadening the scope of examination beyond the existence of an arbitration agreement and deciding disputed factual issues. In such a manner, these references would appear to go against both the letter and spirit of the Supreme Court’s decision in Vidya Drolia. The observation that Section 8 and Section 11 are complementary to each other and that adding Section 11 (6 A) undermines the kompetenz-kompetenz principle and promotes judicial intervention, which goes against the fundamental objective of the arbitration act.
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