VIDYA DROLIA AND OTHERS versus DURGA TRADING CORPORATION

[2020] 11 S.C.R. 1001

VIDYA DROLIA AND OTHERS

DURGA TRADING CORPORATION

(Civil Appeal No. 2402 of 2019 etc.)

DECEMBER 14, 2020

[N.V. RAMANA, SANJIV KHANNA ANDKRISHNA MURARI, JJ.]

Arbitration and Conciliation Act, 1996:

ss. 8 and 11 – Jurisdiction under – Judicial review – Scopeand ambit of – Held: Per Sanjiv Khanna, J. – Scope of judicialreview and jurisdiction of the Court u/s. 8 and 11 is identical, butextremely limited and restricted – The court may interfere at thestage of jurisdiction u/ss. 8 and 11, when it is manifestly and exfacie certain that the arbitration agreement is non-existent, invalidor the disputes are non-arbitrable – The court can not interfereand refer the matter for arbitration when contentions relating tonon-arbitrability are plainly arguable; when consideration insummary proceedings would be insufficient and inconclusive; whenfacts are contested; and when the party opposing arbitration adoptsdelaying tactics or impairs conduct of arbitration proceedings –This is not the stage for the court to enter into mini trial or elaboratereview so as to usurp the jurisdiction of the arbitral tribunal – Atthis stage the court is required to affirm and uphold integrity andefficacy of arbitration as an alternative dispute resolution mechanism–Per Ramana, J. – Sections 8 and 11 have the same ambit i.e.limited judicial interference at reference stage – Usually subjectmatter arbitrability cannot be decided at the stage of ss. 8 and 11,unless it’s clear case of deadwood – Unless party has establisheda prima facie case of non-existence of valid arbitration agreement,the court has to refer the matter for arbitration or to appoint anarbitrator as the case may be i.e. ‘when in doubt, do refer’ – Thescope of the court to examine the prima facie validity of an arbitrationagreement includes only (i) whether arbitration agreement was inwriting; (ii) whether such agreement was contained in exchange ofletters, telecommunication etc. (iii) whether the core contractual

1002SUPREME COURT REPORTS

Aingredients qua arbitration agreement were fulfilled; and (iv) onrare occasions, whether the subject-matter of dispute is arbitrable.

Arbitration:

Landlord-tenant dispute – Governed by Transfer of PropertyAct – Arbitrability of – Held: In order to determine whether theBsubject-matter of dispute in an arbitration agreement is notarbitrable, the four-fold test is when cause of action and subjectmatter of dispute (i) relates to action in rem that do not pertain tosubordinate rights in personam that arise from rights in rem; (ii)affects third party rights, have erga omnes effect, require centralizedCadjudication and mutual adjudication would not be appropriateand enforceable; (iii) relates to inalienable sovereign and publicinterest functions of the State and hence mutual adjudication wouldbe unenforceable;(iv) expressly or by necessary implication non-arbitrable as per mandatory statutes – However, these tests are notwatertight compartments – Landlord-tenant disputes governed byDTransfer of Property Act are arbitrable as per the testsaforementioned – However, such disputes, if covered by rent controllegislation giving exclusive jurisdiction to specific court or forum,would not arbitrable – Transfer of Property Act, 1882.

Deeds and Documents:E

Arbitration agreement – Interpretation of – Held: The approachas to interpretation of arbitration agreement would depend uponvarious factors such as language, parties, nature of relationship,factual background in which the agreement was entered, etc. – Incase of pure commercial disputes, more appropriate principle ofFinterpretation would be the one of liberal construction as there ispresumption in favour of one-stop adjudication.

Doctrines/Principles:

Principle of ‘separation’ and ‘competence-competence’ –Applicability of – Discussed.GDoctrine of ‘election’ – Applicability of.

‘Second look’ principle – Applicability of.

VIDYA DROLIA AND OTHERS v.DURGA TRADING CORPORATION

Judgment:

Judgment in rem and judgment in personam – Distinctionbetween – Discussed.

Words and Phrases:‘Agreement’ – Meaning of.‘Arbitration agreement’ – Meaning of.‘Legal relationship’ – Meaning of.‘Arbitration agreement in writing’ – Meaning of.‘Existence’ – Meaning of.‘Examination’ – Meaning of.‘Existence of an arbitration agreement’ – Meaning of.‘Arbitrability’ – Meaning of.‘Prima facie’ – Meaning of.

Answering the referred questions and disposing of theappeal and the SLPs, the Court

HELD:

Per SANJIV KHANNA, J. (for himself and KRISHNAMURARI, J.):

1.1 Arbitration is private dispute resolution mechanismwhereby two or more parties agree to resolve their current orfuture disputes by an arbitral tribunal, as an alternative toadjudication by the courts or public forum established by law.Parties by mutual agreement forgo their right in law to have theirdisputes adjudicated in the courts/public forum. Arbitrationagreement gives contractual authority to the arbitral tribunal toadjudicate the disputes and bind the parties. [Para 10][1047-G-H]

1.2 The expression ‘arbitration agreement’ has beendefined in clause (b) of sub-section (1) of s. 2 of Arbitration andConciliation Act, 1996 (Arbitration Act) to mean an agreementas defined in Section 7 of the Arbitration Act. The term‘agreement’ is not defined in the Arbitration Act, albeit it is defined

Ain Section 10 of the Contract Act, 1872 (‘Contract Act’), ascontracts made by free consent of parties competent to contract,for lawful consideration and with lawful object, and are notthereby expressly declared to be void. An arbitration agreementshould satisfy the mandate of Section 10 of the Contract Act, inaddition to satisfying other requirements stipulated in the SectionB7 of the Arbitration Act. [Paras 10 and 11][1048-A-H; 1049-A-B]

1.3 Section 28 of the Contract Act states that agreementsin restraint of legal proceedings are void, but Explanation (1)specifically saves contracts by which two or more persons agreethat any dispute, or one which may arise between them, in respectCof any subject or class of subjects shall be referred to arbitration.Arbitration agreement must satisfy the objective mandates of thelaw of contract to qualify as an agreement. Clauses (g) and (h) ofSection 2 of the Contract Act state that an agreement notenforceable in law is void and an agreement enforceable in law isDa contract. As sequitur, it follows that an arbitration agreementthat is not enforceable in law is void and not legally valid. [Para11][1049-D-E]

1.4 Sub-section (1) to Section 7 of Arbitration Act ordainsthat the arbitration agreement should be in respect of disputesEarising from defined legal relationship, whether contractual ornot. The expression ‘legal relationship’, again not defined in theArbitration Act, means relationship which gives rise to legalobligations and duties and, therefore, confers right. Theserights may be contractual or even non-contractual. Non-contractualdisputes would require separate or submission arbitrationFagreement based on the cause of action arising in tort, restitution,breach of statutory duty or some other non-contractual cause ofaction. [Para 12][1049-F-G; 1050-A]

Russell on Arbitration, 24th Edition # 2-004 – referredto.G

1.5 Sub-section (2) to Section 7 states that an arbitrationclause may be in the form of separate agreement or form partof the underlying or another contract. Clause (3) of Section 7 ofthe Arbitration Act states that the arbitration agreement shall be

in writing, that is, the agreement should be evidenced in writing.By clause (4) the term ‘arbitration agreement in writing’ wouldinclude any agreement by exchange of letters, telegrams,electronic mails or communications which provide record ofthe agreement or exchange of statements of claim and defencein which one party claims the existence of the agreement and theother party does not deny it. Sub-section (5) to Section 7 statesthat reference in contract to document containing an arbitrationclause would constitute valid arbitration agreement if thecontract is in writing and reference is made to the arbitrationclause that forms part of the contract. [Para 13][1050-B-D]

1.6 Questions as to the existence of an arbitration agreementalso arise when party opposing the reference raises plea ofnovation of contract by entering into new contract in substitutionof the original or ‘accord and satisfaction’ by acceptance ofmodified obligations in discharge of the contract by performanceor simple termination by express or implied consent. Similar pleaof discharge can be raised opposing an application for referenceon the ground that the claim is long barred and dead or there areno outstanding disputes as the parties have accepted partperformance or have absolved the other side from performance,fully or partly, on account of frustration or otherwise. Thecontention being that once the original contract standsextinguished, abandoned, repudiated or substituted, thearbitration clause in the underlying/original contract perishes withit. [Para 14][1050-D-F]

1.7 Arbitration being matter of contract, the parties areentitled to fix boundaries as to confer and limit the jurisdictionand legal authority of the arbitrator. An arbitration agreementcan be comprehensive and broad to include any dispute or couldbe confined to specific disputes. The issue of scope of arbitrator’sjurisdiction invariably arises when the disputes that are arbitrableare enumerated or the arbitration agreement provides forexclusions as in case of ‘excepted matters’. The arbitrationagreement may be valid, but the arbitral tribunal in view of thewill of the parties expressed in the arbitration agreement, may

Anot have jurisdiction to adjudicate the dispute. The will of theparties as to the scope of arbitration is subjective act andpersonal to the parties. [Para 15][1050-G-H; 1051-A]

1.8 judgment is formal expression of conclusiveadjudication of the rights and liabilities of the parties. TheBjudgment may operate in two ways, in rem or in personam. Ajudgment in rem determines the status of person or thing asdistinct from the particular interest in it of party to the litigation;and such judgment is conclusive evidence for and against allpersons whether parties, privies or strangers of the matteractually decided. Such judgment “settles the destiny of the resCitself” and binds all persons claiming an interest in the propertyinconsistent with the judgment even though pronounced in theirabsence. By contrast, judgment in personam, “although it mayconcern res, merely determines the rights of the litigants interse to the res”. Distinction between judgments in rem andDjudgments in personam turns on their power as res judicata, i.e.judgment in rem would operate as res judicata against the world,and judgment in personam would operate as res judicata onlyagainst the parties in dispute. Use of expressions “rights in rem”and “rights in personam” may not be correct for determining non-arbitrability because of the inter-play between rights in rem andErights in personam. Many times, right in rem results in anenforceable right in personam. [Para 30][1061-D-E; 1062-B-E]G.C.Cheshire and P.M North, Private International Lawby North and Fawcett (London:Butterworth’s) 1992– referred to.F

1.9 Arbitration by necessary implication excludes actionsin rem. Exclusion of actions in rem from arbitration, exposits theintrinsic limits of arbitration as private dispute resolutionmechanism, which is only binding on ‘the parties’ to the arbitrationagreement. The courts established by law on the other hand enjoyGjurisdiction by default and do not require mutual agreement forconferring jurisdiction. The arbitral tribunals not being courts oflaw or established under the auspices of the State cannot actjudicially so as to affect those who are not bound by the arbitration

clause. Arbitration is unsuitable when it has erga omnes effect,that is, it affects the rights and liabilities of persons who are notbound by the arbitration agreement. Equally arbitration as adecentralized mode of dispute resolution is unsuitable when thesubject matter or dispute in the factual background, requirescollective adjudication before one court or forum. Certain disputesas class, or sometimes the dispute in the given facts, can beefficiently resolved only through collective litigation proceedings.Contractual and consensual nature of arbitration underpins itsambit and scope. Authority and power being derived from anagreement cannot bind and is non-effective against non-signatories. An arbitration agreement between two or moreparties would be limpid and inexpedient in situations when thesubject matter or dispute affects the rights and interests of thirdparties or without presence of others, an effective and enforceableaward is not possible. Prime objective of arbitration to securejust, fair and effective resolution of disputes, without unnecessarydelay and with least expense, is crippled and mutilated when therights and liabilities of persons who have not consented toarbitration are affected or the collective resolution of the disputesby including non-parties is required. Arbitration agreement asan alternative to public fora should not be enforced when it isfutile, ineffective, and would be no result exercise. [Para31][1062-G; 1063-A-E]

Prof. Stavros Brekoulakis – ‘On Arbitrability: PersistingMisconceptions and New Areas of Concern’ – referredto.

1.10 Sovereign functions of the State being inalienable andnon-delegable are non-arbitrable as the State alone has theexclusive right and duty to perform such functions. Correctnessand validity of the State or sovereign functions cannot be made adirect subject matter of private adjudicatory process. Sovereignfunctions for the purpose of Arbitration Act would extend toexercise of executive power in different fields includingcommerce and economic, legislation in all forms, taxation, eminentdomain and police powers which includes maintenance of law andorder, internal security, grant of pardon etc., as distinguished from

ABC

Acommercial activities, economic adventures and welfareactivities. Similarly, decisions and adjudicatory functions of theState that have public interest element like the legitimacy ofmarriage, citizenship, winding up of companies, grant of patents,etc. are non-arbitrable, unless the statute in relation to regulatoryor adjudicatory mechanism either expressly or by clearBimplication permits arbitration. In these matters the State enjoysmonopoly in dispute resolution. [Para 32][1063-F-G; 1064-A-B]

Common Cause v. Union of India, (1999) 6 SCC 667:[1999] 3 SCR 1279 ; Agricultural Produce MarketCommittee v. Ashok Harikuni & Another (2000) 8 SCCC61: [2000] 3 Suppl. SCR 379 – relied on.

Ajar Raib – Defining Contours of the Public PolicyException – New Test for Arbitrability – referredto.

D1.11 Implied legislative intention to exclude arbitration canbe seen if it appears that the statute creates special right or aliability and provides for determination of the right and liabilityto be dealt with by the specified courts or the tribunals speciallyconstituted in that behalf and further lays down that all questionsabout the said right and liability shall be determined by the courtEor tribunals so empowered and vested with exclusive jurisdiction. Therefore, mere creation of specific forum as substitute forcivil court or specifying the civil court, may not be enough toaccept the inference of implicit non-arbitrability. Conferment ofjurisdiction on specific court or creation of public forum thoughFeminently significant, may not be the decisive test to answer anddecide whether arbitrability is impliedly barred. Implicit non-arbitrability is established when by mandatory law the parties arequintessentially barred from contracting out and waiving theadjudication by the designated court or the specified public forum.There is no choice. The person who insists on the remedy mustGseek his remedy before the forum stated in the statute and beforeno other forum. [Paras 33 and 34][1065-C-F]

Dhulabhai Etc. v. State of Madhya Pradesh and Another[1968] 3 SCR 662 – relied on.

Wolverhampton New Waterworks Co. v. Hawkesford 9[1859] 6 C.B. (NS) 336 – referred to.

1.12 Doctrine of election to select arbitration as disputeresolution mechanism by mutual agreement is available only ifthe law accepts existence of arbitration as an alternative remedyand freedom to choose is available. There should not be anyinconsistency or repugnancy between the provisions of themandatory law and arbitration as an alternative. Conversely andin given case when there is repugnancy and inconsistency, theright of choice and election to arbitrate is denied. This requiresexamining the “text of the statute, the legislative history, and‘inherent conflict’ between arbitration and the statute’s underlyingpurpose” with reference to the nature and type of special rightsconferred and power and authority given to the courts or publicforum to effectuate and enforce these rights and the orderspassed. When arbitration cannot enforce and apply such rightsor the award cannot be implemented and enforced in the manneras provided and mandated by law, the right of election to choosearbitration in preference to the courts or public forum is eithercompletely denied or could be curtailed. In essence, it isnecessary to examine if the statute creates special right orliability and provides for the determination of each right or liabilityby the specified court or the public forum so constituted, andwhether the remedies beyond the ordinary domain of the civilcourts are prescribed. When the answer is affirmative, arbitrationin the absence of special reason is contraindicated. The disputeis non-arbitrable. [Para 34][1066-E-H; 1067-A-B]

Transcore v. Union of India and Another (2008) 1 SCC125:[2006] 9 Suppl. SCR 785; M.D. Frozen FoodsExports Private Limited and Others v. Hero FincorpLimited (2017) 16 SCC 741: [2017] 13 SCR 800;Indiabulls Housing Finance Limited v. Deccan ChronicleHoldings Limited and Others (2018) 14 SCC 783: [2018]1 SCR 1096 – relied on.

HDFC Bank Ltd. v. Satpal Singh Bakshi, 2013 (134)DRJ 566 (FB) – overruled

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[2020] 11 S.C.R.

AJennifer L. Peresie, Reducing the Presumption ofArbitrability – referred to.

1.13 Section 34(2)(b) of the Arbitration Act consists of twosub-clauses both accrediting the court with the power to set asidean award. Under sub-clause (i) an award is liable to be set asideBwhen the subject matter is not capable of settlement by arbitrationunder law for the time being in force. Under sub-clause (ii) anaward can be set aside if it is in conflict with the public policy ofIndia. As per Explanation No. 1, an award is in conflict with thepublic policy of India only if it was induced or affected by fraud,corruption, etc. or it is in contravention with the fundamentalCpolicy of Indian law or is in conflict with the most basic notions ofmorality or justice. Explanation 2 cautions the courts not to reviewon the merits of the case while examining the question whetheran award is in contravention with the fundamental policy of law. Therefore, conflict with the public policy of India and subjectDmatter of dispute not capable of settlement by arbitration, aretwo separate and independent grounds on which the court canset aside the award. [Para 39][1072-B-D]

1.14 Public policy in the context of non-arbitrability refersto public policy as reflected in the enactment, that is, whetherEthe enactment confers exclusive jurisdiction to the specified courtor the special forum and prohibits recourse to arbitration. Publicpolicy in the context of sub-clause(ii) to Section 34(2)(b) refersto the public policy of the enactment, defining and fixing rightsand obligations, and application of those rights and obligationsby the arbitrator. Statutes unfailingly have public purpose orFpolicy which is the basis and purpose behind the legislation.Application of mandatory law to the merits of the case do notimply that the right to arbitrate is taken away. Mandatory lawmay require particular substantive rule to be applied, but thiswould not preclude arbitration. Implied non-arbitrability requiresGprohibition against waiver of jurisdiction, which happens when astatute gives special rights or obligations and creates or stipulatesan exclusive forum for adjudication and enforcement. Anarbitrator, like the court, is equally bound by the public policybehind the statute while examining the claim on merits. The public

policy in case of non-arbitrability would relate to conferment ofexclusive jurisdiction on the court or the special forum set up bylaw for decision making. Non-arbitrability question cannot beanswered by examining whether the statute has public policyobjective which invariably every statue would have. There is ageneral presumption in favour of arbitrability, which is notexcluded simply because the dispute is permeated by applicabilityof mandatory law. Violation of public policy by the arbitrator couldwell result in setting aside the award on the ground of failure tofollow the fundamental policy of law in India, but not on the groundthat the subject matter of the dispute was non-arbitrable. [Para39][1072-E-H; 1073-A-B]1.15 It would be grossly irrational and completely wrong tomistrust and treat arbitration as flawed and inferior adjudicationprocedure unfit to deal with the public policy aspects of alegislation. Arbitrators, like the courts, are equally bound toresolve and decide disputes in accordance with the public policyof the law. Possibility of failure to abide by public policyconsideration in legislation, which otherwise does not expresslyor by necessary implication exclude arbitration, cannot form thebasis to overwrite and nullify the arbitration agreement. Thiswould be contrary to and defeat the legislative intent reflected inthe public policy objective behind the Arbitration Act. Arbitrationhas considerable advantages as it gives freedom to the parties tochoose an arbitrator of their choice, and it is informal, flexibleand quick. Simplicity, informality and expedition are hallmarks ofarbitration. Arbitrators are required to be impartial andindependent, adhere to natural justice, and follow fair and justprocedure. Arbitrators are normally experts in the subject andperform their tasks by referring to facts, evidence, and relevantcase law. Complexity is not sufficient to ward off arbitration. Interms of the mandate of Section 89 of the Civil Procedure Codeand the object and purpose behind the Arbitration Act and themandatory language of Sections 8 and 11, the mutually agreedarbitration clauses must be enforced. The language of Sections 8and 11 of the Arbitration Act are peremptory in nature. ArbitrationAct has been enacted to promote arbitration as transparent,

Afair, and just alternative to court adjudication. Public policy is toencourage and strengthen arbitration to resolve and settleeconomic, commercial and civil disputes. Amendments from timeto time have addressed the issues and corrected the inadequaciesand flaws in the arbitration procedure. It is for the stakeholders,including the arbitrators, to assure that the arbitration is asBimpartial, just, and fair as court adjudication. It is also the duty ofthe courts at the post-award stage to selectively yet effectivelyexercise the limited jurisdiction, within the four corners of Section34(2)(b)(ii) read with Explanation 1 and 2 and check any conflictwith the fundamental policy of the applicable law. [Para 41][1074-CA-G]

1.16 four-fold test for determining when the subjectmatter of dispute in an arbitration agreement is not arbitrableis (1) when cause of action and subject matter of the disputerelates to actions in rem, that do not pertain to subordinate rightsDin personam that arise from rights in rem. (2) when cause of actionand subject matter of the dispute affects third party rights; haveerga omnes effect; require centralized adjudication, and mutualadjudication would not be appropriate and enforceable. (3) Whencause of action and subject matter of the dispute relates toinalienable sovereign and public interest functions of the StateEand hence mutual adjudication would be unenforceable; (4) Whenthe subject-matter of the dispute is expressly or by necessaryimplication non-arbitrable as per mandatory statute(s). These testsare not watertight compartments; they dovetail and overlap, albeitwhen applied holistically and pragmatically will help and assist in

Fdetermining and ascertaining with great degree of certainty whenas per law in India, dispute or subject matter is non-arbitrable. Only when the answer is affirmative that the subject matter ofthe dispute would be non-arbitrable. However, the aforesaidprinciples have to be applied with care and caution. [Para 45][1077-A-E]G

1.17 Applying the above principles to determine non-arbitrability, it is apparent that insolvency or intra-companydisputes have to be addressed by centralized forum, be thecourt or special forum, which would be more efficient and hascomplete jurisdiction to efficaciously and fully dispose of the entireHmatter. They are also actions in rem. Similarly, grant and issue of

patents and registration of trademarks are exclusive mattersfalling within the sovereign or government functions and haveerga omnes effect. Such grants confer monopoly rights. They arenon-arbitrable. Criminal cases again are not arbitrable as theyrelate to sovereign functions of the State. Further, violations ofcriminal law are offenses against the State and not just againstthe victim. Matrimonial disputes relating to the dissolution ofmarriage, restitution of conjugal rights etc. are not arbitrable asthey fall within the ambit of sovereign functions and do not haveany commercial and economic value. The decisions have ergaomnes effect. Matters relating to probate, testamentary matteretc. are actions in rem and are declaration to the world at largeand hence are non-arbitrable. [Para 46][1077-G-H; 1078-A-C]

1.18 Landlord-tenant disputes governed by the Transfer ofProperty Act are arbitrable as they are not actions in rem butpertain to subordinate rights in personam that arise from rightsin rem. Such actions normally would not affect third-party rightsor have erga omnes affect or require centralized adjudication. Anaward passed deciding landlord-tenant disputes can be executedand enforced like decree of the civil court. Landlord-tenantdisputes do not relate to inalienable and sovereign functions ofthe State. The provisions of the Transfer of Property Act do notexpressly or by necessary implication bar arbitration. Transferof Property Act, like all other Acts, has public purpose, that is,to regulate landlord-tenant relationships and the arbitrator wouldbe bound by the provisions, including provisions which enureand protect the tenants. Therefore landlord-tenant disputes arearbitrable as the Transfer of Property Act does not forbid orforeclose arbitration. However, landlord-tenant disputes coveredand governed by rent control legislation would not be arbitrablewhen specific court or forum has been given exclusive jurisdictionto apply and decide special rights and obligations. Such rightsand obligations can only be adjudicated and enforced by thespecified court/forum, and not through arbitration. [Paras 48 and49][1078-E-H; 1079-A-B]

Chloro Controls India Private Ltd. v. Severn Trent WaterPurification Inc., (2013) 1 SCC 641: [2012] 13

[2020] 11 S.C.R.

SCR 402; Natraj Studios (P) Ltd. v. Navrang Studios(1981) 1 SCC 523: [1981] 2 SCR 466; Booz Allen &Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC532; Olympus Superstructures Pvt. Ltd. v. Meena VijayKhetan and Others (1999) 5 SCC 651: [1999] 3 SCR 490; Vimal Kishor Shah and Others v. Jayesh DineshShah and Other (2016) 8 SCC 788: [2016]7 SCR 102 ; Emaar MGF Land Limited v. Aftab Singh(2019) 12 SCC 751:[2018] 14 SCR 791; A. Avyasamyv. A. Paramasivam and Others (2016) 10 SCC 386 :[2016] 11 SCR 521; Premier Automobiles Ltd. v.Kamlekar Shantaram Wadke of Bombay and Others(1976) 1 SCC 496 : [1976] 1 SCR 427; V.H. Patel &Company and Others v. Hirubhai Himabhai Patel andOthers (2000) 4 SCC 368: [2000] 3 SCR 113; AbdulKadir Samshuddin Bubere v. Madhav Prabharkar Oakand Another AIR 1962 SC 406: [1962] SCR 702 ; AvitelPost Studioz Limited v. HSBC PI Holdings (Mauritius)Limited 2021 (4) SCC 713; Rashid Raza v. SadafAkhthar (2019) 8 SCC 710 – relied on.

Himangni Enterprises v. Kamaljeet Singh Ahluwalia(2017) 10 SCC 706: [2017] 10 SCR 139; N.Radhakrishnan v. Maestro Engineers and Others, (2010)1 SCC 72: [2009] 15 SCR 371 – overruled

Vidya Drolia and Others v. Durga Trading Corporation2019 SCC OnLine SC 358; Sukanya Holdings (P) Ltd.v. Jayesh H. Pandya and Another (2003) 5 SCC 531:[2003] 3 SCR 558; Deccan Paper Mills Co. Ltd. v.Regency Mahavir 2021 (4 ) SCC 786 – referred to.TELUS Communications Inc. v. Avraham Wellman (2019)SCC 19 (CanLII) Mitsubishi Motors Corp v. SolerChrysler Plymouth Inc, 473 U.S. 614 S Ct 3346 (1985)(U.S. Supreme Court, 2 July 1985) – referred to

Vanderbilt Journal of Transnational Law, vol. 36, No.4,October 2003, p. 1115-1136 ‘Who Decides theArbitrator’s Jurisdiction? Separability and Competence-

Competence in Transnational Perspective’ by John J.Barcelo III; Law and Practice of CommercialArbitration in England (2nd Ed. 1989) by Mustill andBoyd; Redfer Hunteron International Arbitration andGary B. Bornin International Commercial Arbitration;A Second Look at Arbitrability: Approaches toArbitration in the United States, Switzerland andGermany by Patrick M. Baron and Stefan Liniger;Conflict of Laws 98, 7th ed. 1974 by R.H. Graveson –referred to.

2.1 Issue of non-arbitrability can be raised at three stages. First, before the court on an application for reference underSection 11 of the Arbitration Act or for stay of pending judicialproceedings and reference under Section 8 of the Arbitration Act;secondly, before the arbitral tribunal during the course of thearbitration proceedings; or thirdly, before the court at the stageof the challenge to the award or its enforcement. [Para 51][1079-D-F]

2.2 Who decides the question of non-arbitrability? - ajurisdictional question is technical legal issue, and requiresclarity when applied to facts to avoid bootstrapping and confusion.The doubt as to who has the jurisdiction to decide could hinder,stray, and delay many arbitration proceedings. To some extent,the answer depends on how much jurisdiction the enactment givesto the arbitrator to decide their own jurisdiction as well as thecourt’s jurisdiction at the reference stage and in the post-awardproceedings. It also depends upon the jurisdiction bestowed bythe enactment, viz. the facet of non-arbitrability in question, thescope of the arbitration agreement and authority conferred onthe arbitrator. [Para 52][1079-F-H; 1080-A-B]

2.3 Under the Arbitration Act, 1940, the jurisdiction to settleand decide non-arbitrability issues relating to existence, validity,scope as well as whether the subject matter was capable ofarbitration, with possible exception in case of termination,novation, frustration and ‘accord and satisfaction’ when contestedon facts, was determined and decided at the first or at thereference stage by the courts. The principle being that the court

Ashould be satisfied about the existence of valid arbitrationagreement and that the disputes have arisen with regard to thesubject matter of the arbitration agreement. At this stage, thecourt would be, however, not concerned with the merits orsustainability of the disputes. Despite best efforts to containobstructive tactics, adjudication and final decision of non-Barbitrability issues at the reference stage would invariably stop,derail and thwart the proceedings in the courts for years. [Para53][1080-A-D]

2.4 The Arbitration Act based upon the UNCITRAL ModelLaw introduced an entirely new regimen with the objective toCpromote arbitration in commercial and economic matters as analternative dispute resolution mechanism that is fair, responsiveand efficient to contemporary requirements. One of the primaryobjectives of the Arbitration Act is to reduce and minimize thesupervisory role of courts. Accordingly, the statutory powers of

Dthe arbitral tribunal to deal with and decide jurisdictional issuesof non-arbitrability were amplified and the principles of separationand competence-competence were incorporated, while the courtsretained some power to have ‘second look’ in the post-awardchallenge proceeding. On the jurisdiction of the court at thereferral stage, views of this Court have differed and there haveEbeen statutory amendments to modify and obliterate the legaleffect of the court decisions. [Para 54][1080-D-F]

2.5 Clauses (a) and (b) to sub-section (1) to Section 16 ofthe Arbitration Act, enact the principle of separation of thearbitration agreement from the underlying or container contract.FClause (a), by legal fiction, gives an independent status to anarbitration clause as if it is standalone agreement, even when itis only clause and an integral part of the underlying or containercontract. Clause (b) formulates legal rule that decision by thearbitral tribunal holding that the main contract is null and voidGshall not ipso jure entail invalidity of the arbitration clause. Successful challenge to the existence or invalidity or rescissionof the main contract does not necessarily embrace an identicalfinding as to the arbitration agreement, provided the court issatisfied that the arbitration clause had been agreed upon. The

arbitration agreement can be avoided only on the ground whichrelates directly to the arbitration agreement. Notwithstanding thechallenge to the underlying or container contract, the arbitrationclause in the underlying or container contract survives fordetermining the disputes. The principle prevents boot-strappingas it is primarily for the arbitral tribunal and not for the court todecide issues of existence, validity and rescission of theunderlying contract. Principle of separation authorises an arbitraltribunal to rule and decide on the existence, validity or rescissionof the underlying contract without an earlier adjudication of thequestions by the referral court. [Para 81][1116-A-E]

Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC141: [1974] 2 SCR 240 ; Union of India v. KishorilalGupta & Bros., AIR 1959 SC 1362: [1960] SCR 49 –referred to.

Fiona Trust and Holding Corpn. v. Privalov (2007) 1All ER (Comm) 891:2007 Bus LR 686 (CA); BuckeyeCheck Cashing Inc. v. Cardegna 163 L Ed 2d 1038: 46US 440 (2006) : 2006 SCC OnLine US SC 14; PrimaPain Corpn. v. Flood & Conklin Mfg. Co. L Ed 2nd1270; 388 US 395 (1967):1967 SCC OnLine US SC160; Southland Corpn. v. Keating, 1984 SCC OnLineUS SC 19 – referred to.

On Arbitrability: Persisting Misconceptions and NewAreas of Concern by Stavros Brekoulaki; EmmanuelGaillard and Yas Banifatemi in Negative Effect ofCompetence-Competence: The Rule of Priority inFavour of the Arbitrators; John J. Barcelo III, ;Papertitled ‘Who Decides the Arbitrator’s Jurisdiction?Separability and Competence-Competence inTransnational Perspective’, by Prof. Stephen J. Ware inArbitration Law’s Separability Doctrine After BuckeyeCheck Cashing, Inc.- referred to.

2.6 Principles of competence-competence have positive andnegative connotations. As positive implication, the arbitraltribunals are declared competent and authorised by law to rule

Aas to their jurisdiction and decide non-arbitrability questions. Incase of expressed negative effect, the statute would govern andshould be followed. Implied negative effect curtails and constrainsinterference by the court at the referral stage by necessaryimplication in order to allow the arbitral tribunal to rule as totheir jurisdiction and decide non-arbitrability questions. As perBthe negative effect, courts at the referral stage are not to decideon merits, except when permitted by the legislation eitherexpressly or by necessary implication, such questions of non-arbitrability. Such prioritisation of arbitral tribunal over the courtscan be partial and limited when the legislation provides for someCor restricted scrutiny at the ‘first look’ referral stage. [Para83][1117-G-H; 1118-A-B]

2.7 Section 16(1) of the Arbitration Act accepts andempowers the arbitral tribunal to rule on its own jurisdictionincluding ruling on the objections, with respect to all aspects ofDnon-arbitrability including validity of the arbitration agreement.A party opposing arbitration, as per sub-section (2), should raisethe objection to jurisdiction of the tribunal before the arbitraltribunal, not later than the submission of statement of defence.However, participation in the appointment procedure orappointing an arbitrator would not preclude and prejudice anyEparty from raising an objection to the jurisdiction. Obviously, theintent is to curtail delay and expedite appointment of the arbitraltribunal. The clause also indirectly accepts that appointment ofan arbitrator is different from the issue and question of jurisdictionand non-arbitrability. As per sub-section (3), any objection that

Fthe arbitral tribunal is exceeding the scope of its authority shouldbe raised as soon as the matter arises. However, the arbitraltribunal, as per sub-section (4), is empowered to admit plearegarding lack of jurisdiction beyond the periods specified in sub-section (2) and (3) if it considers that the delay is justified. As perthe mandate of sub-section (5) when objections to the jurisdictionGunder sub-sections (2) and (3) are rejected, the arbitral tribunalcan continue with the proceedings and pass the arbitrationaward. party aggrieved is at liberty to file an application forsetting aside such arbitral award under Section 34 of the

Arbitration Act. Sub-section (3) to Section 8 in specific termspermits an arbitral tribunal to continue with the arbitrationproceeding and make an award, even when an application undersub-section (1) to Section 8 is pending consideration of the court/forum. Therefore, pendency of the judicial proceedings evenbefore the court is not by itself bar for the arbitral tribunal toproceed and make an award. [Para 84][1118-C-H]

2.8 Section 34 of the Act is applicable at the third stagepost the award when an application is filed for setting aside theaward. Under Section 34, an award can be set aside – (i) if thearbitration agreement is not valid as per law to which the party issubject; (ii) if the award deals with the disputes not contemplatedby or not falling within the submission to arbitration, or containsa decision on the matter beyond the scope of submission toarbitration; and (iii) when the subject matter of the dispute is notcapable of settlement by arbitration under the law for the timebeing in force. Thus, the competence - competence principle, inits negative effect, leaves the door open for the parties tochallenge the findings of the arbitral tribunal on the three issues.The negative effect does not provide absolute authority, but onlya priority to the arbitral tribunal to rule the jurisdiction on thethree issues. The courts have ‘second look’ on the three aspectsunder Section 34 of the Arbitration Act. [Para 85][1119-A-D]2.9 The courts at the referral stage do not performministerial functions. They exercise and perform judicial functionswhen they decide objections in terms of Sections 8 and 11 of theArbitration Act. Section 8 prescribes the courts to refer theparties to arbitration, if the action brought is the subject of anarbitration agreement, unless it finds that prima facie no validarbitration agreement exists. Prima facie case in the context ofSection 8 is not to be confused with the merits of the case put upby the parties which has to be established before the arbitraltribunal. It is restricted to the subject matter of the suit beingprima facie arbitrable under valid arbitration agreement. Primafacie case means that the assertions on these aspects are bonafide. When read with the principles of separation and competence-competence and Section 34 of the Arbitration Act, referral courtwithout getting bogged-down would compel the parties to abide

[2020] 11 S.C.R.

Aunless there are good and substantial reasons to the contrary.[Para 86][1119-D-G; 1120-A-B]

Nirmala J. Jhala v. State of Gujarat and Another (2013)4 SCC 301: [2013] 5 SCR 2006 – relied on.

2.10 Prima facie examination is not full review but primaryBfirst review to weed out manifestly and ex facie non-existent andinvalid arbitration agreements and non-arbitrable disputes. Theprima facie review at the reference stage is to cut the deadwoodand trim off the side branches in straight forward cases wheredismissal is barefaced and pellucid and when on the facts and lawCthe litigation must stop at the first stage. Only when the court iscertain that no valid arbitration agreement exists or the disputes/subject matter are not arbitrable, the application under Section 8would be rejected. At this stage, the court should not get lost inthickets and decide debatable questions of facts. Referralproceedings are preliminary and summary and not mini trial.DThis necessarily reflects on the nature of the jurisdictionexercised by the court. [Para 87][1120-B-D]

NCC Ltd. v. Indian Oil Corporation Ltd., ArbitrationPetition No. 115 of 2018 decided on 08.02.2019; SilverDry Bulk Company Limited v. Homer Hulbert MaritimeECompany Limited, (2017) EWHC 44 (Comm.) –referred to.

Silver Dry Bulk Company Limited v. Homer HulbertMaritime Company Limited (2017) EWHC 44 (Comm.)

– referred toF

2.11 The nature and facet of non-arbitrability could alsodetermine the level and nature of scrutiny by the court at thereferral stage. The court can examine contractual aspects ofarbitration agreement, at referral stage and jurisdictional aspectsof arbitration agreement which he feels should be left to theGarbitral tribunal. The issue of non-arbitrability can be divided intoprocedural and substantive objections. The procedurals are‘gateway questions’ which would presumptively be for thearbitrator to decide at least at the first stage. In the Indian context,

it can be divided into three categories. The first category ofissues, namely, whether the party has approached the appropriateHigh Court, whether there is an arbitration agreement andwhether the party who has applied for reference is party to suchagreement would be subject to more thorough examination incomparison to the second and third categories/issues which arepresumptively, save in exceptional cases, for the arbitrator todecide. The first category, would include the questions or issuesrelating to whether the cause of action relates to action inpersonam or rem; whether the subject matter of the dispute affectsthird party rights, have erga omnes effect, requires centralizedadjudication; whether the subject matter relates to inalienablesovereign and public interest functions of the State; and whetherthe subject matter of dispute is expressly or by necessaryimplication non-arbitrable as per mandatory statue(s). Suchquestions arise rarely and, when they arise, are on most occasionsquestions of law. On the other hand, issues relating to contractformation, existence, validity and non-arbitrability would beconnected and intertwined with the issues underlying the meritsof the respective disputes/claims. They would be factual anddisputed and for the arbitral tribunal to decide. The court may forlegitimate reasons, to prevent wastage of public and privateresources, can exercise judicial discretion to conduct an intenseyet summary prima facie review while remaining conscious thatit is to assist the arbitration procedure and not usurp jurisdictionof the arbitral tribunal. Undertaking detailed full review or along-drawn review at the referral stage would obstruct and causedelay undermining the integrity and efficacy of arbitration as adispute resolution mechanism. Conversely, if the court becomestoo reluctant to intervene, it may undermine effectiveness of boththe arbitration and the court. There are certain cases where theprima facie examination may require deeper consideration. Thecourt’s challenge is to find the right amount of and the contextwhen it would examine the prima facie case or exercise restraint.The legal order needs right balance between avoiding arbitrationobstructing tactics at referral stage and protecting parties frombeing forced to arbitrate when the matter is clearly non-arbitrable.[Para 88][1122-B-H; 1123-A-B]

DEF

1022SUPREME COURT REPORTS

[2020] 11 S.C.R.

ANational Insurance Company Limited v. BogharaPolyfab Private Limited (2009) 1 SCC 267: [2008]13 SCR 638 – relied on.

Ozlem Susler – ‘The English Approach to Competence-Competence’ – referred to.

B2.12 Accordingly, when it appears that prima facie reviewwould be inconclusive, or on consideration inadequate as itrequires detailed examination, the matter should be left for finaldetermination by the arbitral tribunal selected by the parties byconsent. The underlying rationale being not to delay or defer andCto discourage parties from using referral proceeding as rue todelay and obstruct. In such cases full review by the courts atthis stage would encroach on the jurisdiction of the arbitral tribunaland violate the legislative scheme allocating jurisdiction betweenthe courts and the arbitral tribunal. Centralisation of litigationwith the arbitral tribunal as the primary and first adjudicator isDbeneficent as it helps in quicker and efficient resolution ofdisputes. [Para 89][1123-C-E]

2.13 The Court would exercise discretion and refer thedisputes to arbitration when it is satisfied that the contest requiresthe arbitral tribunal should first decide the disputes and rule onEnon-arbitrability. Similarly, discretion should be exercised whenthe party opposing arbitration is adopting delaying tactics andimpairing the referral proceedings. [Para 90][1123-E-F]

Dell Computer Corporation v. Union des consommateursand Olivier Dumoulin [2007] 2 S.C.R. 801; TELUSFCommunications Inc. v. Avraham Wellman (2019) SCC19 (CanLII) – referred to

2.14 Section 11(6) of Arbitration Act requires the court toappoint an arbitrator on an application made by party. Section(6-A) to Section 11 stipulates that the court shall, at the stage ofGappointment under sub-section (4), (5) or (6), confine itself tothe examination of the existence of an arbitration agreement. Sub-section (6-A) was omitted by Act 33 of 2019, but the omissionis in view of the introduction of new regime of institutionalised

arbitration as per the report of the committee headed by JusticeB. N. Srikrishna, dated 30.07.2017. [Para 91][1124-D-E]

2.15 It would be wrong to accept that post omission of sub-section (6-A) to Section 11 the ratio in *Patel Engineering Ltd.would become applicable. *Patel Engineering Ltd. has beenlegislatively overruled and hence would not apply even postomission of sub-section (6-A) to Section 11 of the ArbitrationAct. The omitted sub-section (6-A) to Section 11 of the ArbitrationAct would continue to apply and guide the courts on its scope ofjurisdiction at stage one, that is the pre-arbitration stage.Omission of sub-section (6-A) by Act 33 of 2019 was with thespecific object and purpose and is relatable to by substitution ofsub-sections (12), (13) and (14) to Section 11 of the ArbitrationAct by Act 33 of 2019, which, vide sub-section (3A) stipulatesthat the High Court and this court shall have the power to designatethe arbitral institutions which have been so graded by the Councilunder Section 43-I, provided where graded arbitral institutionis not available, the concerned High Court shall maintain panelof arbitrators for discharging the function and thereupon the HighCourt shall perform the duty of an arbitral institution for referenceto the arbitral tribunal. [Para 91][1124-G-H; 1125-B-E]

Mayavati Trading Private Limited v. Pradyuat DebBurman (2019) 8 SCC 714:[2019] 12 SCR 123 65 –relied on.

2.16 On jurisprudentially and textualism it is possible todifferentiate between existence of an arbitration agreement andvalidity of an arbitration agreement. Such interpretation can drawsupport from the plain meaning of the word “existence’ in s. 11of the Arbitration Act. However, it is equally possible,jurisprudentially and on contextualism, to hold that an agreementhas no existence if it is not enforceable and not binding. Existenceof an arbitration agreement presupposes valid agreement whichwould be enforced by the court by relegating the parties toarbitration. Legalistic and plain meaning interpretation wouldbe contrary to the contextual background including thedefinition clause and would result in unpalatable consequences.

AA reasonable and just interpretation of ‘existence’ requiresunderstanding the context, the purpose and the relevant legalnorms applicable for binding and enforceable arbitrationagreement. An agreement evidenced in writing has no meaningunless the parties can be compelled to adhere and abide by theterms. party cannot sue and claim rights based on anBunenforceable document. Thus, there are good reasons to holdthat an arbitration agreement exists only when it is valid and legal.A void and unenforceable understanding is no agreement to doanything. Existence of an arbitration agreement means anarbitration agreement that meets and satisfies the statutoryCrequirements of both the Arbitration Act and the Contract Actand when it is enforceable in law. [Para 92][1125-F-H; 1126-A-C]

Garware Wall Ropes Limited v. Coastal MarineConstructions and Engineering Limited (2019) 9 SCC209: [2019] 5 SCR 579 – relied on.

2.17 The court at the reference stage exercises judicialpowers. ‘Examination’, as an ordinary expression in commonparlance, refers to an act of looking or considering somethingcarefully in order to discover something. It requires the personto inspect closely, to test the condition of, or to inquire intoEcarefully. It would be rather odd for the court to hold and say thatthe arbitration agreement exists, though ex facie and manifestlythe arbitration agreement is invalid in law and the dispute inquestion is non-arbitrable. The court is not powerless and wouldnot act beyond jurisdiction, if it rejects an application forreference, when the arbitration clause is admittedly or withoutFdoubt is with minor, lunatic or the only claim seeks probate ofa Will. [Para 92 (ii)][1127-A-C]

2.18 Most scholars and jurists accept and agree that theexistence and validity of an arbitration agreement are the same.Most jurisdictions accept and require prima facie review by theGcourt on non-arbitrability aspects at the referral stage. [Para 92(iii) and (iv)][1127-C-D]

2.19 Sections 8 and 11 of the Arbitration Act arecomplementary provisions as was held in *Patel Engineering Ltd.

The object and purpose behind the two provisions is identical tocompel and force parties to abide by their contractualunderstanding. This being so, the two provisions should be readas laying down similar standard and not as laying down differentand separate parameters. Section 11 does not prescribe anystandard of judicial review by the court for determining whetheran arbitration agreement is in existence. Section 8 states thatthe judicial review at the stage of reference is prima facie andnot final. Prima facie standard equally applies when the power ofjudicial review is exercised by the court under Section 11 of theArbitration Act. Therefore, the mandate of valid arbitrationagreement in Section 8 can be read into mandate of Section 11,that is, ‘existence of an arbitration agreement’. [Para 92 (v)][1127-E-G]

2.20 Exercise of power of prima facie judicial review ofexistence as including validity is justified as court is the firstforum that examines and decides the request for the referral.Absolute “hands off” approach would be counterproductive andharm arbitration, as an alternative dispute resolution mechanism.Limited, yet effective intervention is acceptable as it does notobstruct but effectuates arbitration. Exercise of the limited primafacie review does not in any way interfere with the principle ofcompetence–competence and separation as to obstruct arbitrationproceedings but ensures that vexatious and frivolous mattersget over at the initial stage. [Para 92 (vi) and 92 (vii)][1127-G-H;1128-A-B]

2.21 Exercise of prima facie power of judicial review as tothe validity of the arbitration agreement would save costs andcheck harassment of objecting parties when there is clearly nojustification and good reason not to accept plea of non-arbitrability. [Para 92 (viii)][1128-B-C]

Subrata Roy Sahara v. Union of India, (2014) 8 SCC470: [2014] 12 SCR 573; Duro Felguera, S.A v.Gangavaram Port Limited (2017) 9 SCC 729: [2017]10 SCR 285; M.R. Engineers and Contractors PrivateLimited v. Som Datt Builders Limited (2009) 7 SCC696:[2009] 10 SCR 373 – relied on.

A*SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC618:[2005] 4 Suppl. SCR 688; National InsuranceCompany Limited v. Boghara Polyfab Private Limited(2009) 1 SCC 267: [2008] 13 SCR 638; OrientalInsurance Company Ltd. v. Narbheram Power and SteelPrivate Limited (2018) 6 SCC 534: [2018] 4 SCR 826;BVulcan Insurance v. Maharaj Singh (1976) 1 SCC 943: [1976] 2 SCR 62; M/s. PSA Mumbai Investments PTE.Limited v. The Board of Trustees of the JawaharlalNehru Port Trust and Another 2018 (10) SCC 525 –referred to.C2.22 The interpretation appropriately balances the allocationof the decision-making authority between the court at the referralstage and the arbitrators’ primary jurisdiction to decide disputeson merits. The court as the judicial forum of the first instance canexercise prima facie test jurisdiction to screen and knockdownDex facie meritless, frivolous and dishonest litigation. Limitedjurisdiction of the courts ensures expeditious, alacritous andefficient disposal when required at the referral stage. [Para 92(xi)][1129-G-H]

2.23 Section 43(1) of the Arbitration Act states that theELimitation Act, 1963 shall apply to arbitrations as it applies tocourt proceedings. Sub-section (2) states that for the purposesof the Arbitration Act and Limitation Act, arbitration shall bedeemed to have commenced on the date referred to in Section21. Limitation law is procedural and normally disputes, beingfactual, would be for the arbitrator to decide guided by the factsFfound and the law applicable. The court at the referral stage caninterfere only when it is manifest that the claims are ex facie timebarred and dead, or there is no subsisting dispute. All other casesshould be referred to the arbitral tribunal for decision on merits.Similar would be the position in case of disputed ‘no claimGcertificate’ or defence on the plea of novation and ‘accord andsatisfaction’. It is not to be expected that commercial men whileentering transactions inter se would knowingly create systemwhich would require that the court should first decide whetherthe contract should be rectified or avoided or rescinded, as the

case may be, and then if the contract is held to be valid, it wouldrequire the arbitrator to resolve the issues that have arisen. [Para93][1130-A-D]

Filli Shipping Co. Limited v. Premium Nafta ProductsLtd. 2007 UKHL 40 : 2007 Bus LR 1719 (HL) –referred to.

2.24 What is true and applicable for men of commerce andbusiness may not be equally true and apply in case of laymen andto those who are not fully aware of the effect of an arbitrationclause or had little option but to sign on the standard formcontract. Broad or narrow interpretations of an arbitrationagreement can, to great extent, effect coverage of retroactivearbitration agreement. Pro-arbitration broad interpretation,normally applied to international instruments, and commercialtransactions is based upon the approach that the arbitration clauseshould be considered as per the true contractual language andwhat it says, but in case of doubt as to whether related or closedisputes in the course of parties’ business relationship is coveredby the clause, the assumption is that such disputes areencompassed by the agreement. The restrictive interpretationapproach on the other hand states that in case of doubt the disputesshall not be treated as covered by the clause. Narrow approachis based on the reason that the arbitration should be viewed asan exception to the court or judicial system. The third approachis to avoid either broad or restrictive interpretation and insteadthe intention of the parties as to scope of the clause is understoodby considering the strict language and circumstance of the casein hand. Terms like ‘all’, ‘any’, ‘in respect of’, ‘arising out of’etc. can expand the scope and ambit of the arbitration clause.Connected and incidental matters, unless the arbitration clausesuggests to the contrary, would normally be covered. [Para94][1131-B-E]

Oriental Insurance Company Ltd. v. Narbheram Powerand Steel Private Limited (2018) 6 SCC 534: [2018]4 SCR 826 – relied on.

2.25 Which approach as to interpretation of an arbitrationagreement should be adopted in particular case would depend

Aupon various factors including the language, the parties, natureof relationship, the factual background in which the arbitrationagreement was entered, etc. In case of pure commercial disputes,more appropriate principle of interpretation would be the one ofliberal construction as there is presumption in favour of one-stop adjudication. [Para 94][1131-F-G]B

2.26 Therefore, the expression ‘existence of an arbitrationagreement’ in Section 11 of the Arbitration Act, would includeaspect of validity of an arbitration agreement, albeit the court atthe referral stage would apply the prima facie test on the basis ofprinciples set out in this judgment. In cases of debatable andCdisputable facts, and good reasonable arguable case, etc., thecourt would force the parties to abide by the arbitration agreementas the arbitral tribunal has primary jurisdiction and authority todecide the disputes including the question of jurisdiction and non-arbitrability. [Para 95][1131-G-H; 1132-A-B]

2.27 Scope of judicial review and jurisdiction of the courtunder Section 8 and 11 of the Arbitration Act is identical butextremely limited and restricted. Ratio of the decision on thescope of judicial review by the court while deciding an applicationunder Sections 8 or 11 of the Arbitration Act, post theEamendments by Act 3 of 2016 (with retrospective effect from23.10.2015) and even post the amendments vide Act 33 of 2019(with effect from 09.08.2019), is no longer applicable. [Para 96(a) and (b)][1132-B-D]

SBP & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618:F[2005] 4 Suppl. SCR 688– held inapplicable.

2.28 The general rule and principle, in view of the legislativemandate clear from Act 3 of 2016 and Act 33 of 2019, and theprinciple of severability and competence-competence, is that thearbitral tribunal is the preferred first authority to determine andGdecide all questions of non-arbitrability. The court has beenconferred power of “second look” on aspects of non-arbitrabilitypost the award in terms of sub-clauses (i), (ii) or (iv) of Section34(2)(a) or sub-clause (i) of Section 34(2)(b) of the ArbitrationAct. Rarely as demurrer the court may interfere at the Section

8 or 11 stage when it is manifestly and ex facie certain that thearbitration agreement is non-existent, invalid or the disputes arenon-arbitrable, though the nature and facet of non-arbitrabilitywould, to some extent, determine the level and nature of judicialscrutiny. The restricted and limited review is to check and protectparties from being forced to arbitrate when the matter isdemonstrably ‘non-arbitrable’ and to cut off the deadwood. Thecourt by default would refer the matter when contentions relatingto non-arbitrability are plainly arguable; when consideration insummary proceedings would be insufficient and inconclusive;when facts are contested; when the party opposing arbitrationadopts delaying tactics or impairs conduct of arbitrationproceedings. This is not the stage for the court to enter into amini trial or elaborate review so as to usurp the jurisdiction ofthe arbitral tribunal but to affirm and uphold integrity and efficacyof arbitration as an alternative dispute resolution mechanism.[Para 96 (c) and (d)][1132-D-H; 1133-A-B]

Arasmeta Captive Power Company Private Limited andAnother v. Lafarge India Private Limited, (2013) 15SCC 414: [2013] 17 SCR 496; Shin-Etsu Chemical Co.Ltd. v. Aksh Optifibre Ltd. and Another (2005) 7 SCC234:[2005] 2 Suppl. SCR 699; United India InsuranceCompany Limited v. Hyundai Engineering andConstruction Company Limited & Ors. (2018) 17 SCC607:[2018] 12 SCR 1085 – relied on.

A. Ayysamy v. A. Paramsivam, (2016) 10 SCC386:[2016] 11 SCR 521; Konkan Railway Corpn. Ltd.and Others v. Mehul Construction Co., (2000) 7 SCC201:[2000] 2 Suppl. SCR 563; Konkan RailwayConstruction Ltd. and Another v. Rani Construction Pvt.Ltd., (2002) 2 SCC 388: [2002] 1 SCR 728; Enercon(India) Ltd. v. Enercon GmbH (2014) 5 SCC 1:[2014]2 SCR 855 68; Shree Ram Mills Ltd. v. Utility Premises(P) Ltd., (2007) 4 SCC 599: [2007] 4 SCR 279; ChloroControls India Private Ltd. v. Severn Trent WaterPurification Inc., (2013) 1 SCC 641: [2012] 13SCR 402 – referred to.

1030SUPREME COURT REPORTS

APer N. V. RAMANA, J. (Concurring):

1. Arbitration is creature of consensus. It is completelydependent on party autonomy and the intention expressed in theagreement. contract, having multiple clauses includingarbitration agreements, can be divided into two parts. The clausesBrelating to the commercial relationship, i.e., the obligations andduties of each party, can be referred to as the ‘main contract’.The arbitration agreement so to say is separate contract in itself.[Para 14][1137-E-F]

2. The separability of the arbitration agreement from theCmain contract, historically existed in Roman law. Since early times,arbitration was viewed with suspicion, which allowed for thedevelopment of separability. Ironically, the ‘pro-arbitration’function of separability in the present day is late 19th and 20thcentury development, traceable to Germanic and Swissjurisprudence. [Para 15][1137-F-G]D

3. In India, arbitration was governed earlier by theArbitration Act of 1899, and later 1940. Presently, arbitration isgoverned by the Act of 1996, with subsequent amendments. Theintention of the legislature is to make the regime ‘pro-arbitration’.Whenever this Court has afforded contrary view, there has beenEa trend to undo the changes to bring it in line with theinternational standards. [Para 16][1137-G-H; 1138-A-B]

4. Under the old Arbitration Act, 1940, the Court had thediscretion in referring the parties to arbitration, however suchdiscretion is done away with after the coming into force of theF1996 Act. The Arbitration and Conciliation Act, 1996 does not, inspecific terms, exclude any category of disputes—civil orcommercial—from arbitrability. Intrinsic legislative material isin fact to the contrary. Section 8 contains mandate that wherean action is brought before judicial authority in matter whichGis the subject of an arbitration agreement, the parties shall bereferred by it to arbitration, if party to or person claimingthrough party to the arbitration agreement applies not laterthan the date of submitting the first statement on the substanceof the dispute. The only exception is where the authority finds,

prima facie, that there is no valid arbitration agreement. Section8 contains positive mandate and obligates the judicial authorityto refer parties to arbitration in terms of the arbitration agreement.While dispensing with the element of judicial discretion, thestatute imposes an affirmative obligation on every judicialauthority to hold down parties to the terms of the agreemententered into between them to refer disputes to arbitration. Article8 of the UNCITRAL Model Law enabled court to decline torefer parties to arbitration if it is found that the arbitrationagreement is null and void, inoperative or incapable of beingperformed. Section 8 of the Act has made departure from theUNCITRAL law which is indicative of the wide reach and ambitof the statutory mandate. Section 8 uses the expansive expression“judicial authority” rather than “court” and the words “unless itfinds that the agreement is null and void, inoperative andincapable of being performed” do not find place in Section 8. [Para20][1140-A-F]

5. The intention of the legislators to provide for Section 34in its present form, is to have limited review of the award insteadof full-fledged appeal process. party intending to object to anaward, is first required to file an application under Section 34 (1)indicating the objections along with the copy of an award and othernecessary documents, which are required as proof to satisfygrounds provided under Section 34(2)(a) and (b) of the Act. Suchcomplete petition is required to be filed within the time periodprescribed under Section 34 (3) of the Act, failing which the appealis rendered nugatory. The limitation prescribed under Section34(3) is bound with the right to file objections itself. The objectionsfiled under Section 34 must be relatable to the limited groundsprovided under Section 34 (2) of the Act. It is the legislativeintention to provide for numerous limitations under Section 34of the Act, which are required to be strictly adhered to so as tomake Indian arbitration time-bound and commercially prudentto opt for the same. Section 37 of the Act, provides for limitedappeal against the Section 34 order, as well as against certainother specified orders. [Para 25][1151-G-H; 1152-A-C]

A6. The present structure of arbitration is such that Courtsare to assist and support arbitration and leave the substantivepart of adjudication to the arbitral tribunal. On plain reading ofthe Act, whenever dispute arises between parties, they are freeto approach an appropriate judicial forum to get their disputeresolved. If the parties have contemplated an arbitrationBagreement, then they can approach tribunal for getting the matterresolved. Once they choose the non-judicial method, partyaggrieved by the award, has chance to approach judicialinstitutions under Section 34 and 37 (appeal jurisdiction), if theaward is violative of the grounds provided thereunder. [Paras 27Cand 28][1153-A-D]

7. The propositions, concerning Section 11 of the Act, are: First - Reference power under Section 11 of the Act is judicialand not administrative. Second - There was wide discretion forjudicial interference at the stage of reference under Section 11 ofDthe Act, prior to the Arbitration Amendment Act of 2015. Third -Amendment in 2015 was brought into force to limit the power ofjudicial interference under Section 11 of the Act. Thesepropositions are clear and binding. [Para 43][1166-D-F]

8. Section 8 of the Act applies, when matter is brought byEone of the parties before the Court, and the other party brings tothe notice of the Court of existence of such arbitration agreement.Under these circumstances, the Court is obligated to refer amatter to arbitration, on satisfaction that valid arbitrationagreement exists between the parties. The 2015 amendmentclarified that the test to be utilized by the Court is on primaFfacie basis. The primary reason for the same, is the negative effectof Kompetenz Kompetenz under Section 16, which mandates thatthe arbitral tribunal is required to first look into any objectionsas to the jurisdiction of the tribunal itself. It is due to the fact thatparties may abuse and protract the proceedings if there is noGgatekeeping mechanism, that the legislature has found balance,wherein the Court is required to examine the validity of anarbitration agreement on prima facie basis. [Paras 44 and45][1166-F-G]

9. The ‘validity’ to be examined under Section 8(2) of theAct, could be interpreted to mean formal validity as expressedunder Section 7 of the Act. Such an interpretation would operateas full application of the negative facet of Section 16, as thejurisdiction of the Court to step-in at the -reference stage wouldbe limited. [Para 46][1167-B-C]

10. Outside the United States of America, the term“arbitrability” has reasonably precise and limited meaning,relating to whether specific classes of disputes are barred fromarbitration because of national legislation or judicial authority. Inthe United States of America, arbitrability also refers to thecomplicated balance between courts and arbitrators regardingwho should be the initial decision-maker on issues such as thevalidity of the arbitration agreement. Out of the two meanings,this Court subscribes to the international flavor, which is one ofthe cherished legislative intentions, i.e., to bring the arbitrationact in tune with the global march. [Para 48][1167-E-F]

11. Even if Tribunal comes to an understanding that thereexists valid arbitration agreement, still it does not mean thatcertain subject matters are arbitrable per se. This distinction isrequired to be kept in mind. [Para 49][1167-G-H]

12. Section 34(2)(b) provides the statutory basis for objectingthat an award which may not be capable of being settled byarbitration, or is against the public policy of India. The legislativeintention of not arbitrating issues of public policy are intertwinedwith the fact that monopolies of the State activities should not besubject matter of private tribunal, as the concerns of the Statecannot not be dealt effectively. Further, an award, which has anerga omnes effect on third parties, would not be in tune with thecontractual nature of arbitration, which is binding on the consentingparties alone. However, this feature alone, does not explicitlymandate that the tribunal cannot first adjudicate claim based onthe public policy argument. Whether subject matter can orcannot be arbitrated should necessarily be dealt on case to casebasis, rather than having bold exposition that certain subjectmatters are incapable of arbitration. [Paras 50 and 51][1168-A-D]

A13. However, the plea of public policy is required to bespecifically identified, pleaded and shown with respect to howthe award is contrary to the public policy. It may be possible thatthere may be certain claims abutting restricted sphere, whichmay not be specifically hit by public policy or have erga omneseffect. If that be so, it would be too early at the stage of referenceBto determine the same as it would require complete examinationof the issue at hand, which is more suited to be first dealt by theTribunal and thereafter be looked into at the stage of enforcement.[Paras 51][1169-C-E]

14. An arbitration agreement would, as necessaryCimplication, carry with it presumption of one-stop mechanism.When parties decide to enter into an arbitration agreement, theyagree to take all their disputes before arbitration. Thispresumption, is rebuttable presumption. Therefore, Section 8and 11 has to be interpreted with sufficient strictness, whereinDthe jurisdiction of the Court to decide issues should be limited tothose expressly provided by the law. [Para 54][1170-B-C]

15. The Act itself does not exclude any category of disputesas being non-arbitrable. However, the Courts have used the‘public policy’ reason to restrict arbitration with respect to certainEsubject matters. However, post the 2015 amendment, thestructure of the Act was changed to bring it in tune with the pro-arbitration approach. Under the amended provision, the Courtcan only give prima facie opinion on the existence of validarbitration agreement. In line with the amended language andthe statutory scheme, the examination of the subject matterFarbitrability may not be appropriate at the stage of reference underSection 8 of the Arbitration Act. It is more appropriate to be takenup by the Court at the stage of enforcement under Section 34 ofthe Act. In clear cases where the subject matter arbitrability isclearly barred, the Court can cut the deadwood to preserve theGefficacy of the arbitral process. [Paras 59 and 60][1172-G-H; 1173-A-B]

16. Arbitrators have been given jurisdiction to decide onthe subject matter arbitrability. They are required to identifyspecific public policy in order to determine the subject matter

arbitrability. Merely because matter verges on prohibitedterritory, should not by itself stop the arbitrator from decidingthe matter. He/she should be careful in considering the questionof non-arbitrability. [Para 61][1173-B-C]

17. The meaning and scope of ‘prima facie’, as is requiredto determine the non-existence of valid arbitration agreementunder Section 8 of the Act has greatly varied in common law aswell as the civil law systems. At least two meanings can beattributed to this term. First, it means party is said to haveestablished prima facie case when he has satisfied his burdenof producing evidence. The second meaning postulates that aparty has established prima facie case only when he has madesuch strong showing that he is entitled to presumption in hisfavor. Prima facie case is relatable to establishment of initialpresumption, rather than an evidentiary standard. [Paras 62 and63][1173-C-G]

18. The difference of statutory language provided underthe amended Section 8, which states ‘refer the parties to arbitrationunless it finds that prima facie no valid arbitration agreement exists’in comparison with the amended Section 11(6A), createsdisparities which need to be ironed out. While the Court in the*Shin-Etsu case and the **Duro Felguera case recommendedfor finding valid arbitration agreement on prima facie basisqua Section 11, however, the negative language used under theamended Section 8 mandates for referring matter to arbitrationunless the Court prima facie finds that no valid arbitration exists.A finding of non-existence of arbitration agreement is final subjectto the appeal process only, without further scope for arbitrationtribunal to decide anything as there can be no further reference.If that be the case, then the usage of phrase ‘prima facie’ standsat odds with the established precedents on prima facie standards.In this context, the Court can only stress on the requirement ofquality legislative drafting protocols to eliminate suchcomplications. [Para 65][1176-B-E]

19. Thus, the respondent/defendant has to establish primafacie case of non-existence of valid arbitration agreement, wherein

Ait is to be summarily portrayed that party is entitled to such afinding. If party cannot satisfy the Court of the same on thebasis of documents produced, and rather requires extensiveexamination of oral and documentary production, then the matterhas to be necessarily referred to the Tribunal for full trial. Suchlimited jurisdiction vested with the Court, is necessary at theBpre-reference stage to appropriately balance the power of theTribunal with judicial interference. [Para 66][1176-E-G]

20. The amendment to the aforesaid provision was meantto cut the dead wood in extremely limited circumstances, whereinthe respondent is able to ex-facie portray non-existence of validCarbitration agreement, on the documents and the pleadingsproduced by the parties. The prima facie view, which started itsexistence under Section 45 through *Shin-Etsu Case has beenexplicitly accommodated even under domestic arbitration by the2015 amendment with appropriate modifications. [Para 67][1176-DG-H; 1177-A]

21. If the ‘good arguable case standard’ is integrated for aparty requiring to show non-existence, then the same wouldamount to judicial activism. Such attempts to integrate alienformulations into the Act, which has already suffered sufficientEjudicial subjectivism, needs to be dissuaded. [Para 68][1177-B-C]

Duro Felguera, S.A. v. Gangavaram Port, (2017) 9 SCC729:[2017] 10 SCR 285 – relied on

22. The existence of arbitration agreement does not meanFanything unless such agreement is contractually valid. mereagreement is not legally binding, unless it satisfies the corecontractual requirements, concerning consent, consideration,legal relationship, etc. Therefore, the scope of the Court toexamine the prima facie validity of an arbitration agreementGincludes only the determination of the following: Whether thearbitration agreement was in writing? Or Whether the arbitrationagreement was contained in exchange of letters,telecommunication, etc? Whether the core contractual ingredientsqua the arbitration agreement were fulfilled? On rare occasions,whether the subject-matter of dispute is arbitrable? [ParaH69][1178-A-B]

Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman,(2019) 8 SCC 714 : [2019] 12 SCR 123; Garware WallRopes Ltd. v. Coastal Marine Construction andEngineering Ltd., [2019] 9 SCC 209: [2019]5 SCR 579 – relied on.

23. The negative language used in the Section 8 is requiredto be taken into consideration, while analyzing the Section. TheCourt should refer matter if the validity of the arbitrationagreement cannot be determined on prima facie basis.Therefore, the rule for the Court is ‘when in doubt, do refer’.[Para 69][1178-C-D]

24. Moreover, the amendment to Section 8 now rectifiesthe short-comings pointed out in the ***Chloro Control Case withrespect to domestic arbitration. Jurisdictional issues concerningwhether certain parties are bound by particular arbitration, undergroup-company doctrine or good faith, etc., in multi-partyarbitration raises complicated factual questions, which are bestleft for the tribunal to handle. The amendment to Section 8 onthis front also indicates the legislative intention to further reducethe judicial interference at the stage of reference. [Para 70][1178-D-F]

25. Courts, while analyzing case under Section 8, maychoose to identify the issues which require adjudication pertainingto the validity of the arbitration agreement. If the Court cannotrule on the invalidity of the arbitration agreement on primafacie basis, then the Court should stop any further analysis andsimply refer all the issues to arbitration to be settled. [Para71][1178-F-G]

26. The statutory language of Section 8 and 11 are different,however materially they do not vary and both Sections providefor limited judicial interference at reference stage. They havethe same ambit with respect to judicial interference. Usually,subject matter arbitrability cannot be decided at the stage ofSections 8 or 11 of the Act, unless it’s clear case of deadwood.The Court, under Sections 8 and 11, has to refer matter toarbitration or to appoint an arbitrator, as the case may be, unlessa party has established prima facie (summary findings) case ofnon-existence of valid arbitration agreement, by summarily

Aportraying strong case that he is entitled to such finding. [Paras73 and 75][1179-B-H]

***Chloro Controls India Private Ltd. v. Severn TrentWater Purification Inc., (2013) 1 SCC 641: [2012] 13SCR 402; **Duro Felguera, S.A. v. Gangavaram Port(2017) 9 SCC 729: [2017] 10 SCR 285; MayavatiTrading Pvt. Ltd. v. Pradyuat Deb Burman (2019) 8 SCC714: [2019] 12 SCR 123; Avitel Post Studioz Limited v.HSBC PI Holdings (Mauritius) Limited 2021 (4)SCC 713; Booz Allen and Hamilton Inc. v. SBI HomeFinance Ltd. (2011) 5 SCC 532; A. Ayysamy v. A.Paramsivam, (2016) 10 SCC 386:[2016] 11 SCR 521;Emaar MGF Land Limited v. Aftab Singh (2019) 12 SCC751 : [2018] 14 SCR 791; Garware Wall Ropes Ltd. v.Coastal Marine Construction and Engineering Ltd.,[2019] 9 SCC 209: [2019] 5 SCR 579 – relied on.

Himangni Enterprises v. Kamaljeet Singh Ahluwalia,(2017) 10 SCC 706[2017] 10 SCR 139; ICICI BankLtd. v. Sidco Leathers Ltd. (2006) 10 SCC 452:[2006]1 Suppl. SCR 528; Konkan Railway Corpn. Ltd. v.Mehul Construction Co. : [2002] 1 SCR 728; KonkanRailway Corporation Ltd. v. Rani Construction (P.) Ltd.,(2002) 2 SCC 388:[2000] 2 Suppl. SCR 563; SBP &Co. v. Patel Engineering Ltd., (2005) 8 SCC 618 : [2005]4 Suppl. SCR 688; *Shin-Etsu Chemical Co. Ltd. v.Aksh Optifibre Ltd.(2005) 7 SCC 234 : [2005] 2 Suppl. SCR 699 ; Shree Ram Mills Ltd. v. Utility Premises (P)Ltd., (2007) 4 SCC 599 : [2007] 4 SCR 279; NationalInsurance Company Limited v. Boghara Polyfab PrivateLimited (2009) 1 SCC 267: [2008] 13 SCR 638;Arasmeta Captive Power Company Private Limited v.Lafarge India Pvt. Ltd., (2013) 15 SCC 414: [2013]17 SCR 496; Oriental Insurance Company Ltd. v.Narbheram Power and Steel Private Limited (2018) 6SCC 534: [2018] 4 SCR 826; Vulcan Insurance v.Maharaj Singh (1976) 1 SCC 943: [1976] 2 SCR 62;United India Insurance Company Limited v. Hyundai

VIDYA DROLIA AND OTHERS v.DURGA TRADING CORPORATION

Engineering and Construction Company Limited & Ors.(2018) 17 SCC 607 : [2018] 12 SCR 1085; UnitedIndia Insurance Company Limited v. Antique Art ExportsPrivate Limited (2019) 5 SCC 362:[2019] 5 SCR 521;New India Assurance Co. Ltd. v. Genus PowerInfrastructure Ltd., (2015) 2 SCC 424: [2014]12 SCR 360 – referred to.

The London Steamship Owners’ Mutual InsuranceAssociation Ltd v The Kingdom of Spain and The FrenchState [2015] EWCA Civ 333; Noble Denton MiddleEast v. Noble Denton International Ltd., [2010] EWHC2574 (Comm.) – referred to.

Commentary on the Law of Arbitration, Vol. I, 4th Ed.,p. 317. by Justice Indu Malhotra; 246th LawCommission Report – referred to

Case Law Reference

1040SUPREME COURT REPORTS

[2020] 11 S.C.R.

A[2018] 14 SCR 791[2014] 12 SCR 360 [2019] 5 SCR 579

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2402of 2020.BFrom the Judgment and Order dated 07.09.2019 of the High Courtof Calcutta in A.P. No. 286 of 2016.

With

Special Leave Petition (Civil) Nos. 5605-5606 of 2019 and SpecialLeave Petition No. 11877 of 2020.CManoj Swarup, Sunit S. Shah, K.V.. Vishwanathan, Nakul Dewan,

CManoj Swarup, Sunit S. Shah, K.V.. Vishwanathan, Nakul Dewan,Maninder Singh, Sr. Advs., Debajyoti Basu, Ms. Soumya Dutta, AjayKumar, Pinakin M. Raval, Pathik Acharya, Neelmani Pant, Ms. VidishaSwarup, Ashish Chaubey, Kumar Shivam, Rajith Kumar, GopalShankarnarayanan, Ashok Kumar Jain, Amar Dave, Pankaj Jain, BijoyKumar Jain, Amit Kasera, Vishal Sinha, Mukunda Rao, Raghav Shankar,DPradhuman Gohil, Mrs. Taruna Singh Gohil, Ms. Ranu Purohit,Sambit Nanda, Rohan Naik, Bijal H. Chhatrapati, Anjali Anchayil,Ms. Avni Sharma, Prabhas Bajaj, Dheeraj Nair, Saurav Agarwal,Kunal Chatterji, P.C. Sharma, T. R. B. Sivakumar, Ansuman Choudhury,Pravar Veer Misra, Vibhu Anshuman, Ms. Aakriti Dawar, Advs. for theappearing parties.E

The Judgments of the Court were delivered by

SANJIV KHANNA, J.

This judgment decides the reference to three Judges made videorder dated 28th February, 2019 in Civil Appeal No. 2402 of 2019 titledVidya Drolia and Others v. Durga Trading Corporation,[1] as it doubtsFthe legal ratio expressed in Himangni Enterprises v. Kamaljeet SinghAhluwalia[2]that landlord-tenant disputes governed by the provisions ofthe Transfer of Property Act, 1882, are not arbitrable as this would becontrary to public policy.

2. deeper consideration of the order of reference reveals thatGthe issues required to be answered relate to two aspects that are distinctand yet interconnected, namely:

(i) meaning of non-arbitrability and when the subject matter ofthe dispute is not capable of being resolved through arbitration; and

1 2019 SCC OnLine SC 358H2 (2017) 10 SCC 706

(ii) the conundrum – “who decides” – whether the court at thereference stage or the arbitral tribunal in the arbitration proceedingswould decide the question of non-arbitrability.

The second aspect also relates to the scope and ambit of jurisdictionof the court at the referral stage when an objection of non-arbitrability israised to an application under Section 8 or 11 of the Arbitration andConciliation Act, 1996 (for short, the ‘Arbitration Act’).

3. We are not reproducing and examining the factual matrix, aswe are only answering the legal issues raised. However, we would refer,in brief, to the legal reasoning and the ratio in Himangni Enterprisesand the counter view expressed in the order of reference in Vidya Drolia.

4. Himangni Enterprises upheld the decision of the High Courtand the District Court rejecting the application filed by the defendant-tenant under Section 8 of the Arbitration Act in civil suit seeking itseviction from shop in commercial complex in New Delhi. The suitwas also for the recovery of arrears of rent and permanent injunction.The tenancy in question was not protected under the rent controllegislation and the rights and obligations were governed by the Transferof Property Act. Two Judges of this Court held that the issue of non-arbitrability is no longer res integra as it stood answered by decisions inNatraj Studios (P) Ltd. v. Navrang Studios[3]and Booz Allen &Hamilton Inc. v. SBI Home Finance Ltd.[4]In Natraj Studios (P)Ltd., wherein an application under Section 8 of the Arbitration Act, 1940was dismissed as the tenancy was protected under the Bombay Rents,Hotel and Lodging Houses Rates Control Act, 1947, it was observedthat on broader consideration of public policy, the arbitrator lackedjurisdiction to decide the question whether the licensee-landlord wasentitled to seek possession. The dispute could be exclusively decided bythe Court of Small Causes, which alone had jurisdiction. In Booz Allen& Hamilton Inc., it was held that in eviction or tenancy matters governedby special statutes and where the tenant enjoys statutory protection,only the specified court has been conferred jurisdiction. HimangniEnterprises relying on the said ratios holds that though the Delhi RentAct is not applicable, it does not follow that the Arbitration Act would be

3 (1981) 1 SCC 523

4 (2011) 5 SCC 532: (2011) 2 SCC (Civ) 781

Aapplicable so as to confer jurisdiction on the arbitrator. Even in cases oftenancies governed by the Transfer of Property Act, the dispute wouldbe triable by the civil court and not by the arbitrator. The exemptionfrom the applicability of the Rent Act could be withdrawn and thereuponthe rights would be governed by the rent control legislation.

B5. In Vidya Drolia, another division bench referring to Section11(6-A) has observed that the referral stage requirement is to onlyexamine ‘existence of an arbitration agreement’ and not validity of thearbitration agreement. 246th Report of the Law Commission of Indiahad suggested twin examination whether the agreement ‘exists’ or is‘null and void’, albeit the Section 11(6-A), as enacted, requires ‘existenceCof an arbitration agreement’, and the prerequisite that the arbitrationagreement should not be ‘null and void’ was deliberately omitted. Thewording of Section 11(6-A) was contrasted with Section 16(1) to drawdistinction between ‘validity of an arbitration agreement’ and ‘existenceof an arbitration agreement’. Reference was made to observations ofDKurian Joseph, J. in Duro Felguera, S.A v. Gangavaram Port Limited,[5]to the effect that the scope of Section 11(6-A) is limited, only to seewhether an arbitration agreement exists – nothing more, nothing less.The legislative policy and purpose are to essentially minimize judicialintervention at the appointment stage. Referring to Sections 111, 114 and114A of the Transfer of Property Act, it is observed that there is nothingEin this Act and law to show that dispute relating to the determination oflease, arrears of rent etc. cannot be decided by an arbitrator. The groundspredicated on public policy could be raised before the arbitrator as theycould be raised before the court. The arbitrator could well abide by theprovisions of Sections 114 and 114A, and apply the public policyFconsiderations for the protection of tenants as class. Referring to BoozAllen & Hamilton Inc., it was observed that the right in rem is rightexercisable against the world at large and is not amenable to arbitration,whereas in case of rights in personam an interest is protected against aspecific individual, and is referable to arbitration. Further, subordinate

rights in personam arising from rights in rem have always beenGconsidered to be arbitrable. Decision in Natraj Studios (P) Ltd. wasdistinguishable, as the rent control legislation being applicable, the tenancydisputes were to be exclusively decided by the small cause court inBombay. The legislation had provided that no other court would havejurisdiction to entertain any suit, proceedings or deal with such claim orH5 (2017) 9 SCC 729

questions. The exception in the form of non-arbitrable landlord- tenantdisputes, as per Booz Allen & Hamilton Inc., was confined only tothose cases/matters governed by: (i) special statues, (ii) where the tenantenjoys statutory protection and (iii) where only specific courts areconferred jurisdiction to decide disputes. Transfer of Property Act doesnot negate arbitrability. In Olympus Superstructures Pvt. Ltd. v. MeenaVijay Khetan and Others,[6] it was held that there is no prohibition in theSpecific Relief Act, 1963 for referring disputes relating to specificperformance of contracts to arbitration. Equally, the discretion to refuseor grant specific performance would not militate against arbitrability.Reference was made to Vimal Kishor Shah and Others v. JayeshDinesh Shah and Other,[7] which had referred to Dhulabhai Etc. v.State of Madhya Pradesh and Another,[8] in the context of whether thedisputes under the Indian Trusts Act, 1882 were arbitrable. The disputesunder the Trusts Act were held to be non-arbitrable by necessaryimplication, as the Trusts Act had conferred specific powers on theprincipal judge of the civil court, which powers an arbitrator could notexercise. The judgment in Vimal Kishor Shah was followed by anotherDivision Bench in Emaar MGF Land Limited v. Aftab Singh,[9] caserelating to the Consumer Protection Act, 1986. Reasoning that theexemption from rent control legislation can be withdrawn and thereuponArbitration Act would not apply, it was observed, was not validjustification and ground to hold that the subject matter was not arbitrable.

6. Learned counsel for the parties have primarily relied upon thereasoning given in Himangni Enterprises and Vidya Drolia and havereferred to other case law which we would subsequently examine. Toavoid prolixity and repetition, we are not reproducing the respectivecontentions and arguments, as the same would be dealt with andappreciated during the course of our reasoning. However, weacknowledge that the oral submissions and compilations have been ofimmense help. Similarly, scholarly writings in books and articles expressingdiverse views on non- arbitrability and Who Decides Non-arbitrabilityhave facilitated us unclog the legal and jurisprudential nuances andcontradictions to try and resolve the issues in the context of domesticlaw of arbitration in India.

6 (1999) 5 SCC 6517 (2016) 8 SCC 7888 (1968) 3 SCR 6629 (2019) 12 SCC 751

A7. At the outset we begin with the caveat that this judgment doesnot examine and interpret the transnational provisions of arbitration inPart II of the Arbitration Act.

Non-Arbitrability

8. Non-arbitrability is basic for arbitration as it relates to the veryBjurisdiction of the arbitral tribunal. An arbitral tribunal may lack jurisdictionfor several reasons. Non-arbitrability has multiple meanings. Booz Allen& Hamilton Inc. refers to three facets of non-arbitrability, namely: -

“(i) Whether the disputes are capable of adjudication andsettlement by arbitration? That is, whether the disputes, havingCregard to their nature, could be resolved by private forum chosenby the parties (the Arbitral Tribunal) or whether they wouldexclusively fall within the domain of public fora (courts).

(ii) Whether the disputes are covered by the arbitration agreement?That is, whether the disputes are enumerated or described in theDarbitration agreement as matters to be decided by arbitration orwhether the disputes fall under the “excepted matters” excludedfrom the purview of the arbitration agreement.

(iii) Whether the parties have referred the disputes to arbitration?EThat is, whether the disputes fall under the scope of the submissionto the Arbitral Tribunal, or whether they do not arise out of thestatement of claim and the counterclaim filed before the ArbitralTribunal. dispute, even if it is capable of being decided byarbitration and falling within the scope of an arbitration agreement,Fwill not be “arbitrable” if it is not enumerated in the joint list ofdisputes referred to arbitration, or in the absence of such jointlist of disputes, does not form part of the disputes raised in thepleadings before the Arbitral Tribunal.”

GJohn J. Barcelo III, in his paper titled ‘Who Decides theArbitrator’s Jurisdiction? Separability and Competence-Competence in Transnational Perspective’,[10] in the context oftransnational commercial transactions, has divided facets relating to non-arbitrability into seven categories:

H10 Vanderbilt Journal of Transnational Law, vol. 36, no.4, October 2003, p. 1115-1136

“Stage 1# is crucial concerning whether arbitration is allowed togo forward efficaciously or is obstructed by court intervention. AtStage 1, party opposing arbitration may raise any of series oflegal issues requiring court, rather than arbitrator, decision. Thesemay include any or all of the following claims: (1) the containercontract is invalid (for reason that would not directly invalidatethe arbitration clause); (2) no arbitration agreement came intoexistence between the parties; (3) an existing arbitration agreementis either formally invalid (for example, not in writing) or materiallyinvalid (for example, violative of mandatory law); (4) disputedissue is not within the scope of the arbitration agreement; (5)mandatory law prohibits disputed issue, though within the scopeof the parties’ arbitration agreement, to be arbitrated (a specialtype of material invalidity respecting specific issue fraught withpublic policy concerns, such as (formerly) antitrust or securitiesfraud); (6) some precondition for permissible arbitration has notbeen met (for example, time-limit on initiating arbitration); (7)the party seeking arbitration has waived its right to arbitrate or isestopped from claiming that right.”

(#Stage 1 is the referral stage.)

9. Validity of the legal ratio in Himangni Enterprises cannot bedecided without examining when subject matter or dispute is non-arbitrable. Understanding of the different facets of non- arbitrability isimportant as it would help us appreciate the consequences. This wouldassist in deciding whether the court or the arbitral tribunal has thejurisdiction to decide the particular facet of non-arbitrability. Thejurisdiction could well depend on the nature and type of the non-arbitrabilityalleged. The order of reference in Vidya Drolia draws distinction forthe purpose of exercise of jurisdiction between non-arbitrability on accountof existence and non-arbitrability on account of the validity of anarbitration agreement.

10. Arbitration is private dispute resolution mechanism wherebytwo or more parties agree to resolve their current or future disputes byan arbitral tribunal, as an alternative to adjudication by the courts or apublic forum established by law. Parties by mutual agreement forgo theirright in law to have their disputes adjudicated in the courts/public forum.Arbitration agreement gives contractual authority to the arbitral tribunalto adjudicate the disputes and bind the parties. The expression ‘arbitration

ABC

Aagreement’ has been defined in clause (d) of sub-section (2) to mean anagreement as defined in Section 7 of the Arbitration Act. Section 7 ofthe Arbitration Act reads:

“7. Arbitration agreement. — (1) In this Part, “arbitrationagreement” means an agreement by the parties to submit toBarbitration all or certain disputes which have arisen or which mayarise between them in respect of defined legal relationship,whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitrationclause in contract or in the form of separate agreement.

C(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in—

(a) document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means ofDtelecommunication which provide record of the agreement;or

(c) an exchange of statements of claim and defense in whichthe existence of the agreement is alleged by one party and notdenied by the other.

E(5) The reference in contract to document containing anarbitration clause constitutes an arbitration agreement if thecontract is in writing and the reference is such as to make thatarbitration clause part of the contract.”

11. The term ‘agreement’ is not defined in the Arbitration Act,Falbeit it is defined in Section 10 of the Indian Contract Act, 1872 (forshort, the ‘Contract Act’),[11] as contracts made by free consent of partiescompetent to contract, for lawful consideration and with lawful object,and are not thereby expressly declared to be void. Section 10 of theContract Act also stipulates that aforesaid requirements shall not affectany law in force in India (and not expressly repealed) by which contractG

11 10. What agreements are contracts. — All agreements are contracts if they aremade by the free consent of parties competent to contract, for lawful considerationand with lawful object, and are not hereby expressly declared to be void. Nothingherein contained shall affect any law in force in India, and not hereby expressly repealed,by which any contract is required to be made in writing or in the presence of witnesses,Hor any law relating to the registration of documents.

is required to be made in writing, in presence of witnesses or any lawrelating to registration of documents. Thus, an arbitration agreementshould satisfy the mandate of Section 10 of the Contract Act, in additionto satisfying other requirements stipulated in the Section 7 of theArbitration Act. Sections 12 to 18 of the Contract Act state when aperson can be said to be of sound mind for the purpose of contractingand define the expressions ‘consent’, ‘free consent’, ‘coercion’, ‘undueinfluence’, ‘fraud’ and ‘misrepresentation’. Sections 19 to 23 relate tovoidability of agreements, the power to set aside contracts induced byundue influence, when both the parties are under mistake as to matterof fact, effect of mistake as to the law, effect of mistake by oneparty as to matter of fact and what considerations and objects arelawful and unlawful. Sections 24 to 30 relate to void contracts and Sections26 and 27 therein state that agreements in restraint of marriage andagreements in restraint of trade, respectively are void, albeit Explanation(1) to Section 27 saves agreements for not carrying out the business ofwhich goodwill is sold. Section 28 of the Contract Act states thatagreements in restraint of legal proceedings are void, but Explanation(1) specifically saves contracts by which two or more persons agreethat any dispute, or one which may arise between them, in respect ofany subject or class of subjects shall be referred to arbitration. Arbitrationagreement must satisfy the objective mandates of the law of contract toqualify as an agreement. Clauses (g) and (h) of Section 2 of the ContractAct state that an agreement not enforceable in law is void and anagreement enforceable in law is contract. As sequitur, it follows thatan arbitration agreement that is not enforceable in law is void and notlegally valid.

12. Sub-section (1) to Section 7 ordains that the arbitrationagreement should be in respect of disputes arising from defined legalrelationship, whether contractual or not. The expression ‘legal relationship’,again not defined in the Arbitration Act, means relationship which givesrise to legal obligations and duties and, therefore, confers right. Theserights may be contractual or even non-contractual.[12 ]Non-contractual

12 Legal relationship will be normally followed by certain immediate or remoteconsequences in the form of action or non-action by the judicial and executive agents ofthe society as distinct from purely private affairs or other events which have nothing todo with law. Legal relationship exists in every situation that is or may be procedurallyasserted for declaration or denial of right or for imposition of sanction or any otherpurpose within the scope of adjudicative action. In actual practice, objection regardingdefined legal relationship is seldom raised and tested.

Adisputes would require separate or submission arbitration agreementbased on the cause of action arising in tort, restitution, breach of statutoryduty or some other non-contractual cause of action.[13]

13. Sub-section (2) to Section 7 is of some importance as it statesthat an arbitration clause may be in the form of separate agreement orBform part of the underlying or another contract. Clause (3) of Section7 of the Arbitration Act states that the arbitration agreement shall be inwriting, that is, the agreement should be evidenced in writing. By clause(4) the term ‘arbitration agreement in writing’ would include anyagreement by exchange of letters, telegrams, electronic mails orcommunications which provide record of the agreement or exchangeCof statements of claim and defence in which one party claims theexistence of the agreement and the other party does not deny it. Sub-section (5) to Section 7 states that reference in contract to documentcontaining an arbitration clause would constitute valid arbitrationagreement if the contract is in writing and reference is made to theDarbitration clause that forms part of the contract.

14. Questions as to the existence of an arbitration agreement alsoarise when party opposing the reference raises plea of novation ofcontract by entering into new contract in substitution of the original or‘accord and satisfaction’ by acceptance of modified obligations inEdischarge of the contract by performance or simple termination by expressor implied consent. Similar plea of discharge can be raised opposing anapplication for reference on the ground that the claim is long barred anddead or there are no outstanding disputes as the parties have acceptedpart performance or have absolved the other side from performance,fully or partly, on account of frustration or otherwise. The contention isFthat once the original contract stands extinguished, abandoned, repudiatedor substituted, the arbitration clause in the underlying/original contractperishes with it.

15. Arbitration being matter of contract, the parties are entitledto fix boundaries as to confer and limit the jurisdiction and legal authorityGof the arbitrator. An arbitration agreement can be comprehensive andbroad to include any dispute or could be confined to specific disputes.The issue of scope of arbitrator’s jurisdiction invariably arises when thedisputes that are arbitrable are enumerated or the arbitration agreementprovides for exclusions as in case of ‘excepted matters’. The arbitrationH13 Russell on Arbitration, 24th Edition # 2-004

agreement may be valid, but the arbitral tribunal in view of the will of theparties expressed in the arbitration agreement, may not have jurisdictionto adjudicate the dispute. The will of the parties as to the scope ofarbitration is subjective act and personal to the parties.

16. Another facet, not highlighted earlier, arises from the dictumin Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya and Another,[14] adecision upholding rejection of an application under Section 8, on theground that there is no provision in the Arbitration Act to bifurcate anddivide the causes or parties, that is, the subject matter of the suit/judicialproceedings, and parties to the arbitration agreement. The suit should bein respect of ‘matter’ which the parties have agreed to refer andwhich comes within the ambit of the arbitration agreement. The words‘a matter’, it was interpreted, would indicate that the entire subject matterof the suit should be subject to arbitration agreement. Bifurcation ofsubject matter or causes of action in the suit is not permissible andcontemplated. Similarly, the parties to the suit should be bound by thearbitration agreement, as there is no provision in the Arbitration Act tocompel third persons who have not exercised the option to give up theright to have access to courts and be bound by the arbitration clause.This would violate party autonomy and consensual nature of arbitration.Bifurcation in such cases would result in suit being divided into twoparts, one being decided by the arbitral tribunal, and the other by thecourt or judicial authorities. This would defeat the entire purpose andinevitably delay the proceedings and increase cost of litigation, causeharassment and on occasions give rise to conflicting judgments andorders by two different fora. Cause of action in relation to the subjectmatter relates to the scope of the arbitration agreement and whether thedispute can be resolved by arbitration. Second mandate relating tocommon parties exposits the inherent limitation of the arbitration processwhich is consensual and mutual, an aspect we would subsequentlyexamine.

17. two Judges’ Bench in Booz Allen & Hamilton Inc., whileinterpreting the dictum in Sukanya Holdings (P) Ltd., had drawn adistinction between ambit and scope of judicial inquiry while deciding anapplication under Section 8(1) of the Arbitration Act which is filed inpending civil suit/judicial proceedings and an application for reference ofthe dispute to arbitration under Section 11 of the Arbitration Act. In

ABooz Allen & Hamilton Inc. it was observed:

“32. The nature and scope of issues arising for consideration inan application under Section 11 of the Act for appointment ofarbitrators, are far narrower than those arising in an applicationunder Section 8 of the Act, seeking reference of the parties to aBsuit to arbitration. While considering an application under Section11 of the Act, the Chief Justice or his designate would not embarkupon an examination of the issue of “arbitrability” orappropriateness of adjudication by private forum, once he findsthat there was an arbitration agreement between or among theparties, and would leave the issue of arbitrability for the decisionCof the Arbitral Tribunal. If the arbitrator wrongly holds that thedispute is arbitrable, the aggrieved party will have to challengethe award by filing an application under Section 34 of the Act,relying upon sub-section (2)(b)(i) of that section.”

However, in SBP & Co. v. Patel Engineering Ltd. andDAnother,[15] the majority judgment of the Constitution Bench of sevenJudges had noticed the complementary nature of Sections 8 and 11 ofthe Arbitration Act, and has observed:

“16. We may at this stage notice the complementary nature ofSections 8 and 11. Where there is an arbitration agreement betweenEthe parties and one of the parties, ignoring it, files an action beforea judicial authority and the other party raises the objection thatthere is an arbitration clause, the judicial authority has to considerthat objection and if the objection is found sustainable to refer theparties to arbitration. The expression used in this section is “shall”Fand this Court in P. Anand Gajapathi Raju v. P.V.G. Raju and inHindustan Petroleum Corpn. Ltd. v. Pinkcity MidwayPetroleums has held that the judicial authority is bound to referthe matter to arbitration once the existence of valid arbitrationclause is established. Thus, the judicial authority is entitled to, hasto and is bound to decide the jurisdictional issue raised before it,Gbefore making or declining to make reference. Section 11 onlycovers another situation. Where one of the parties has refused toact in terms of the arbitration agreement, the other party movesthe Chief Justice under Section 11 of the Act to have an arbitrator

appointed and the first party objects, it would be incongruous tohold that the Chief Justice cannot decide the question of his ownjurisdiction to appoint an arbitrator when in parallel situation, thejudicial authority can do so. Obviously, the highest judicial authorityhas to decide that question and his competence to decide cannotbe questioned. If it is held that the Chief Justice has no right orduty to decide the question or cannot decide the question, it willlead to an anomalous situation in that judicial authority underSection 8 can decide, but not Chief Justice under Section 11,though the nature of the objection is the same and the consequenceof accepting the objection in one case and rejecting it in the other,is also the same, namely, sending the parties to arbitration. Theinterpretation of Section 11 that we have adopted would not giveroom for such an anomaly.”

We are clearly bound by the dictum of the Constitutional Benchjudgment in Patel Engineering Ltd. that the scope and ambit of court’sjurisdiction under Section 8 or 11 of the Arbitration Act is similar. Anapplication under Section 11 of the Arbitration Act need not set out indetail the disputes or the claims and may briefly refer to the subjectmatter or broad contours of the dispute. However, where judicialproceedings are initiated and pending, specific details of the claims anddisputes are normally pleaded and, therefore, the court or the judicialauthority has the advantage of these details. There is difference betweena non-arbitrable claim and non-arbitrable subject matter. Former mayarise on account of scope of the arbitration agreement and also whenthe claim is not capable of being resolved through arbitration. Generallynon-arbitrability of the subject matter would relate to non-arbitrability inlaw. Further, the decision in Sukanya Holdings (P) Ltd. has to be readalong with subsequent judgment of this Court in Chloro Controls IndiaPrivate Limited v. Severn Trent Water Purification Inc. and Others.[16]The effect of amendment by Act 3 of 2016 with retrospective effectfrom 20.10.2015 on Sections 8 and 11 of the Arbitration Act with thestipulation that the amendments apply notwithstanding any earlierjudgment has been examined by us under the heading Who DecidesNon-arbitrability.

18. Sub-section (3) to Section 2 of the Arbitration Act states:

A“Section 2(3)- this Part shall not affect any other law for the timebeing in force by virtue of which certain disputes may not besubmitted to arbitration.”

The Arbitration Act clearly recognizes and accepts that certaindisputes or subjects are not capable of being resolved by arbitration.BSimilarly, Section 34(2)(b)(i) of the Arbitration Act states that the courtsmay set aside awards when they find that “the subject matter of thedispute is not capable of settlement by arbitration”. However, the twosub-sections conspicuously do not enumerate or categorize non-arbitrablematters or state the principles for determining when dispute is non-arbitrable by virtue of any other law[17] for the time being in force. It isCleft to the courts by ex visceribus actus to formulate the principles fordetermining non-arbitrability. As, exclusion from arbitrability ispredominantly matter of case law, we begin by examining the caselaw on the subject.

19. In Booz Allen & Hamilton Inc., elucidating on the questionDof non- arbitrability of dispute, it has been observed:

“35. The Arbitral Tribunals are private fora chosen voluntarily bythe parties to the dispute, to adjudicate their disputes in place ofcourts and tribunals which are public fora constituted under thelaws of the country. Every civil or commercial dispute, eitherEcontractual or non-contractual, which can be decided by court,is in principle capable of being adjudicated and resolved byarbitration unless the jurisdiction of the Arbitral Tribunals isexcluded either expressly or by necessary implication. Adjudicationof certain categories of proceedings are reserved by the legislatureFexclusively for public fora as matter of public policy. Certainother categories of cases, though not expressly reserved foradjudication by public fora (courts and tribunals), may by necessaryimplication stand excluded from the purview of private fora.Consequently, where the cause/dispute is inarbitrable, the courtwhere suit is pending, will refuse to refer the parties to arbitration,Gunder Section 8 of the Act, even if the parties might have agreedupon arbitration as the forum for settlement of such disputes.

xxxx

H17 Section 34(2)(b)(i) of the Arbitration Act

37. It may be noticed that the cases referred to above relate toactions in rem. right in rem is right exercisable against theworld at large, as contrasted from right in personam which is aninterest protected solely against specific individuals. Actions inpersonam refer to actions determining the rights and interests ofthe parties themselves in the subject- matter of the case, whereasactions in rem refer to actions determining the title to propertyand the rights of the parties, not merely among themselves butalso against all persons at any time claiming an interest in thatproperty. Correspondingly, judgment in personam refers to ajudgment against person as distinguished from judgment againsta thing, right or status and judgment in rem refers to judgmentthat determines the status or condition of property which operatesdirectly on the property itself. (Vide Black’s Law Dictionary.)

38. Generally and traditionally all disputes relating to rights inpersonam are considered to be amenable to arbitration; and alldisputes relating to rights in rem are required to be adjudicated bycourts and public tribunals, being unsuited for private arbitration.This is not however rigid or inflexible rule. Disputes relating tosubordinate rights in personam arising from rights in rem havealways been considered to be arbitrable.”

Booz Allen & Hamilton Inc. states that civil or commercialdispute, whether contractual or non-contractual, which can be decidedby court, is in principle capable of being adjudicated and resolved byan arbitral tribunal unless the jurisdiction of the arbitral tribunal is eitherexpressly or by necessary implication excluded.

Legislature is entitled to exclusively reserve certain category ofproceedings for public forums, be it court or forum created orempowered by the State to the exclusion of private forum. Exclusion ofthe jurisdiction of the arbitral tribunal are matters of public policy. Whenpublic policy mandates and states that case or dispute is non-arbitrable,the court would not allow an application under Section 8 (or even Section11 as observed supra) even if the parties have agreed upon arbitrationas the mechanism for settlement of such disputes.

20. Exclusion or non-arbitrability when clearly expressed wouldpose no difficulty and should be respected. However, exclusion or non-arbitrability of subjects or disputes from the purview of private forum

Alike arbitration by necessary implication requires setting out the principlesthat should be applied.

21. Booz Allen & Hamilton Inc. draws distinction betweenactions in personam, that is, actions which determine the rights andinterests of parties themselves in the subject matter of the case, andBactions in rem which refer to actions determining the title of the propertyand the rights of the parties not merely amongst themselves but alsoagainst all the persons at any time claiming an interest in that property.Rights in personam are considered to be amenable to arbitration anddisputes regarding rights in rem are required to be adjudicated by thecourts and public tribunals. The latter actions are unsuitable for privateCarbitration. Disputes relating to subordinate rights in personam arisingfrom rights in rem are considered to be arbitrable. Paragraph 36 of thejudgment in Booz Allen & Hamilton Inc. refers to certain examples ofnon- arbitrable disputes and reads:

“36. The well-recognised examples of non-arbitrable disputes are:D(i) disputes relating to rights and liabilities which give rise to orarise out of criminal offenses; (ii) matrimonial disputes relating todivorce, judicial separation, restitution of conjugal rights, childcustody; (iii) guardianship matters; (iv) insolvency and winding-up matters; (v) testamentary matters (grant of probate, letters ofEadministration and succession certificate); and (vi) eviction ortenancy matters governed by special statutes where the tenantenjoys statutory protection against eviction and only the specifiedcourts are conferred jurisdiction to grant eviction or decide thedisputes.”

F22. Landlord-tenant disputes governed by rent control legislationare not actions in rem, yet they are non-arbitrable. In Booz Allen &Hamilton Inc. reference was made to Russell on Arbitration (22ndEdition) in Para 2.007 at Page 28 wherein the author has observed thatcertain matters in English Law are reserved for the court alone and if anarbitral tribunal purports to deal with them the resulting award would beGunenforceable. These matters would include where the type of remedyrequired is not one which the arbitral tribunal is empowered to give.Reference was made to Law and Practice of Commercial Arbitrationin England (2nd Ed. 1989) by Mustill and Boyd which states that certaintypes of remedies which the arbitrator can award are limited byHconsideration of public policy and as arbitrator is appointed by the parties

and not by the State. Arbitrator cannot impose fine, give imprisonment,commit person for contempt or issue writ of subpoena nor can hemake an award binding on third parties and affect public at large, suchas judgment in rem. Mustill and Boyd in their 2001 Companion Volumehave observed that axiomatically rights that are valid as against the wholeworld, cannot be subject of private arbitration, although subordinaterights in personam derived from such rights may be ruled upon by thearbitrators. Therefore, rights under patent license may be arbitratedbut the validity of the underlying patent may not be arbitrable. Similarly,an arbitrator who derives its power from private agreement betweenA and B, plainly has no jurisdiction to bind third person by decision onwhether the patent is valid or not, for no one else has mandated him tomake the decision and the decision which attempts to do so would beuseless.

23. Analysing provisions of Order XXXIV of the Code of CivilProcedure, 1908, Booz Allen & Hamilton Inc. holds that this Order notonly relates to execution of decree, it provides for preliminary and finaldecrees to satisfy the substantive rights of mortgagees with referenceto their mortgage security. The provisions of Transfer of Property Actread with the Code relating to mortgage suits makes it clear that allpersons having interest either in the mortgage security or in the right ofredemption have to be joined as parties whether they are parties to themortgage or not. The object of the provisions is to avoid multiplicity ofsuits/proceedings and to enable all the interested persons to raise theirdefences and claims, which are to be taken note of while dealing withthe claim in the mortgage suit. By passing preliminary decree or finaldecree, the court adjudicates, adjusts and safeguards the interests of notonly the mortgager or mortgagee but also puisne/mesne mortgagees,persons entitled to the equity of redemption, persons having an interestin the mortgaged property, auction-purchasers and persons in possession,which an arbitral tribunal cannot do. Therefore, suit for foreclosure orredemption of mortgage property can be dealt with by public forumand not by private forum.

24. D.Y. Chandrachud, J. in A. Ayyasamy v. A. Paramasivamand Others,[18] referring to the dictum in Booz Allen & Hamilton Inc.,has made two important comments:

“35...This Court held that this class of actions operates in rem,which is right exercisable against the world at large as contrastedwith right in personam which is an interest protected againstspecified individuals. All disputes relating to rights in personamare considered to be amenable to arbitration while rights in remare required to be adjudicated by courts and public tribunals...

38. Hence, in addition to various classes of disputes which aregenerally considered by the courts as appropriate for decision bypublic fora, there are classes of disputes which fall within theCexclusive domain of special fora under legislation which confersexclusive jurisdiction to the exclusion of an ordinarily civil court.That such disputes are not arbitrable dovetails with the generalprinciple that dispute which is capable of adjudication by anordinary civil court is also capable of being resolved by arbitration.However, if the jurisdiction of an ordinary civil court is excludedDby the conferment of exclusive jurisdiction on specified court ortribunal as matter of public policy such dispute would not thenbe capable of resolution by arbitration.”25. In Vimal Kishor Shah disputes relating to private trusts,trustees, and beneficiaries of the trust and the Trusts Act were held toEbe non-arbitrable. The Order of Reference explains why disputes underthe Trusts Act are non-arbitrable by necessary implication, for whichreference was made to few sections of the Trusts Act to demonstratehow the disputes could not be made the subject matter of arbitration.The reasoning is illustrative and elucidating: -

“27...Under Section 34 of the Indian Trusts Act, trustee may,without instituting suit, apply by petition to principal Civil Courtof original jurisdiction for its opinion, advice, or direction on anypresent questions respecting management or administration of trustproperty, subject to other conditions laid down in the Section.Obviously, an arbitrator cannot possibly give such opinion, advice,or direction. Under Section 46, trustee who has accepted thetrust, cannot afterward renounce it, except, inter alia, with thepermission of principal Civil Court of original jurisdiction. Thisagain cannot be the subject matter of arbitration. Equally, underSection 49 of the Indian Trusts Act, where discretionary power

conferred on trustee is not exercised reasonably and in goodfaith, only principal Civil Court of original jurisdiction can controlsuch power, again making it clear that private consensualadjudicator has no part in the scheme of this Act. Under Section53, no trustee may, without the permission of principal CivilCourt of original jurisdiction, buy or become mortgagee or lesseeof the trust property or any part thereof. Here again, suchpermission can only be given by an arm of the State, namely, theprincipal Civil Court of original jurisdiction. Under Section 74 ofthe Indian Trusts Act, under certain circumstances, beneficiarymay apply by petition to principal Civil Court of original jurisdictionfor the appointment of trustee or new trustee, and the Courtmay appoint such trustee accordingly. Here again, such anappointment cannot possibly be by consensual adjudicator. Itcan only be done by petition to principal Civil Court of originaljurisdiction. Also, it is important to note that it is not any civil courtthat has jurisdiction, but only one designated court, namely, aprincipal Civil Court of original jurisdiction. All this goes to showthat by necessary implication, disputes arising under the IndianTrusts Act cannot possibly be referred to arbitration.”

26. In Emaar MGF Land Limited, the Division Bench referredto the object and the purpose behind the Consumer Protection Act, 1986as law that meets the long-felt necessity of protecting the commonman as consumer against wrongs and misdeeds for which the remedyunder the ordinary law has become illusory as the enforcement machinerydoes not move, or moves ineffectively or inefficiently. Thus, to removehelplessness and empower consumers against powerful businesses andthe might of the public bodies, the enactment has constituted consumerforums with extensive and wide powers to award, wherever appropriate,compensations to the consumers and to impose penalties for non-compliance with their orders. The Consumer Protection Act has specificprovisions for execution and effective implementation of their orderswhich powers are far greater than the power of the ordinary civil court.After referring to the amendments made to Sections 8 and 11 ofArbitration Act by Act No. 3 of 2016, it was observed that the amendmentscannot be given such expansive meaning so as to inundate entire regimeof special legislation where such disputes are not arbitrable. Thisamendment was not intended to side-line or override the settled law onnon-arbitrability. Reference was made to an earlier decision in Premier

AAutomobiles Ltd. v. Kamlekar Shantaram Wadke of Bombay andOthers[19]wherein examining Section 9 of the Code of Civil Procedure inthe context of rights and remedies under Industrial Disputes Act, 1947 itwas observed that the legislature has made provisions for the investigationand settlement of industrial disputes between unions representing theworkmen and the management. The authorities constituted under theBAct have extensive powers in the matter of industrial disputes. LabourCourt and Tribunal can lay down new industrial policy for industrial peaceand order, or reinstatement of dismissed workmen, which no civil courtcan do. For this, the provisions of Industrial Disputes Act completelyoust the jurisdiction of the civil court for trial of the industrial disputes.CThe intent of the legislature is to protect the interest of workmen andconsumers in larger public interest in the form of special rights and byconstituting judicial forum with powers that civil court or an arbitratorcannot exercise. Neither the workmen nor consumers can waive theirright to approach the statutory judicial forums by opting for arbitration.

D27. In Olympus Superstructures Pvt. Ltd., this Court had heldthat an arbitrator can grant specific performance as there is no prohibitionin the Specific Relief Act, 1963. This decision on the question ofarbitrability has observed, and in our humble opinion rightly, as under:

“34. In our opinion, the view taken by the Punjab, Bombay andECalcutta High Courts is the correct one and the view taken by theDelhi High Court is not correct. We are of the view that the rightto specific performance of an agreement of sale deals withcontractual rights and it is certainly open to the parties to agree— with view to shorten litigation in regular courts — to referthe issues relating to specific performance to arbitration. There isFno prohibition in the Specific Relief Act, 1963 that issues relatingto specific performance of contract relating to immovableproperty cannot be referred to arbitration. Nor is there such aprohibition contained in the Arbitration and Conciliation Act, 1996as contrasted with Section 15 of the English Arbitration Act, 1950Gor Section 48(5)(b) of the English Arbitration Act, 1996 whichcontained prohibition relating to specific performance of contractsconcerning immovable property.

35. It is stated in Halsbury’s Laws of England, 4th Edn.,(Arbitration, Vol. 2,para 503) as follows:H19 (1976) 1 SCC 496

“503. Nature of the dispute or difference.—The dispute ordifference which the parties to an arbitration agreement agreeto refer must consist of justiciable issue triable civilly. fairtest of this is whether the difference can be compromisedlawfully by way of accord and satisfaction (Cf. Bac AbrArbitrament and Award A).”

28. In V.H. Patel & Company and Others v. HirubhaiHimabhai Patel and Others,[20] this Court has held that in deference tothe arbitration clause covering all matters there was no principle of lawor provision that bars an arbitrator from deciding whether the dissolutionof partnership is just and equitable.

29. Having examined and analysed the judgments, we wouldcoalesce and crystalize the legal principles for determining non-arbitrability. We begin by drawing principles that draw distinction betweenadjudication of actions in rem and adjudication of actions in personam.

30. judgment is formal expression of conclusive adjudicationof the rights and liabilities of the parties. The judgment may operate intwo ways, in rem or in personam. Section 41 of the Indian EvidenceAct, 1872 on the question of relevancy of judgments in the context ofconclusiveness of judgment, order or decree provides:

“41. Relevancy of certain judgments in probate, etc.,jurisdiction.—A final judgment, order or decree of competentCourt, in the exercise of probate, matrimonial admiralty orinsolvency jurisdiction which confers upon or takes away fromany person any legal character, or which declares any person tobe entitled to any such character, or to be entitled to any specificthing, not as against any specified person but absolutely, is relevantwhen the existence of any such legal character, or the title of anysuch person to any such thing, is relevant.

Such judgment, order or decree is conclusive proof—

that any legal character, which it confers accrued at the timewhen such judgment, order or decree came into operation;

that any legal character, to which it declares any such personto be entitled, accrued to that person at the time when suchjudgment, [order or decree] declares it to have accrued to thatperson;

Athat any legal character which it takes away from any suchperson ceased at the time from which such judgment, [orderor decree] declared that it had ceased or should cease;

and that anything to which it declares any person to be soentitled was the property of that person at the time from whichBsuch judgment, [order or decree] declares that it had been orshould be his property.”

judgment in rem determines the status of person or thing asdistinct from the particular interest in it of party to the litigation; andsuch judgment is conclusive evidence for and against all persons whetherCparties, privies or strangers of the matter actually decided. Such ajudgment “settles the destiny of the res itself” and binds all personsclaiming an interest in the property inconsistent with the judgment eventhough pronounced in their absence.[21] By contrast, judgment inpersonam, “although it may concern res, merely determines the rightsof the litigants inter se to the res”.[22 ]Distinction between judgments inDrem and judgments in personam turns on their power as res judicata,[23]i.e. judgment in rem would operate as res judicata against the world,and judgment in personam would operate as res judicata only againstthe parties in dispute. Use of expressions “rights in rem” and “rights inpersonam” may not be correct for determining non-arbitrability becauseEof the inter-play between rights in rem and rights in personam. Many atimes, right in rem results in an enforceable right in personam. BoozAllen & Hamilton Inc. refers to the statement by Mustill and Boydthat the subordinate rights in personam derived from rights in rem canbe ruled upon by the arbitrators, which is apposite. Therefore, claimfor infringement of copyright against particular person is arbitrable,Fthough in some manner the arbitrator would examine the right to copyright,a right in rem. Arbitration by necessary implication excludes actions inrem.

31. Exclusion of actions in rem from arbitration, exposits theintrinsic limits of arbitration as private dispute resolution mechanism,Gwhich is only binding on ‘the parties’ to the arbitration agreement. The

21 G.C. Cheshire & P.M. North, Private International Law 12th ed. by North & Fawcett(London: Butterworth’s, 1992, p. 36222 Ibid

23 G.C. Cheshire & P.M. North, Private International Law 12th ed. by North & FawcettH(London: Butterworth’s, 1992

courts established by law on the other hand enjoy jurisdiction by defaultand do not require mutual agreement for conferring jurisdiction. Thearbitral tribunals not being courts of law or established under the auspicesof the State cannot act judicially so as to affect those who are not boundby the arbitration clause. Arbitration is unsuitable when it has erga omneseffect, that is, it affects the rights and liabilities of persons who are notbound by the arbitration agreement. Equally arbitration as decentralizedmode of dispute resolution is unsuitable when the subject matter or adispute in the factual background, requires collective adjudication beforeone court or forum. Certain disputes as class, or sometimes the disputein the given facts, can be efficiently resolved only through collectivelitigation proceedings. Contractual and consensual nature of arbitrationunderpins its ambit and scope. Authority and power being derived froman agreement cannot bind and is non-effective against non-signatories.An arbitration agreement between two or more parties would be limpidand inexpedient in situations when the subject matter or dispute affectsthe rights and interests of third parties or without presence of others, aneffective and enforceable award is not possible. Prime objective ofarbitration to secure just, fair and effective resolution of disputes, withoutunnecessary delay and with least expense, is crippled and mutilated whenthe rights and liabilities of persons who have not consented to arbitrationare affected or the collective resolution of the disputes by including non-parties is required. Arbitration agreement as an alternative to public forashould not be enforced when it is futile, ineffective, and would be noresult exercise.[24]

32. Sovereign functions of the State being inalienable and non-delegable are non-arbitrable as the State alone has the exclusive rightand duty to perform such functions.[25 ]For example, it is generally acceptedthat monopoly rights can only be granted by the State. Correctness andvalidity of the State or sovereign functions cannot be made directsubject matter of private adjudicatory process. Sovereign functionsfor the purpose of Arbitration Act would extend to exercise of executivepower in different fields including commerce and economic, legislationin all forms, taxation, eminent domain and police powers which includesmaintenance of law and order, internal security, grant of pardon etc., as

24 Prof. Stavros Brekoulakis – ‘On Arbitrability: Persisting Misconceptions and NewAreas of Concern’

25 Ajar Raib – Defining Contours of the Public Policy Exception – New Test forArbitrability

Adistinguished from commercial activities, economic adventures andwelfare activities.[26] Similarly, decisions and adjudicatory functions ofthe State that have public interest element like the legitimacy of marriage,citizenship, winding up of companies, grant of patents, etc. are non-arbitrable, unless the statute in relation to regulatory or adjudicatorymechanism either expressly or by clear implication permits arbitration.BIn these matters the State enjoys monopoly in dispute resolution.

33. Fourth principle of non-arbitrability is alluded to in the Orderof Reference, which makes specific reference to Vimal Kishor Shah,which decision quotes from Dhulabhai, case which dealt with exclusionof jurisdiction of civil courts under Section 9 of the Civil Procedure Code.CThe second condition in Dhulabhai reads as under:

“32. (2) Where there is an express bar of the jurisdiction of thecourt, an examination of the scheme of the particular Act to findthe adequacy or the sufficiency of the remedies provided may berelevant but is not decisive to sustain the jurisdiction of the civilDcourt.

Where there is no express exclusion the examination of theremedies and the scheme of the particular Act to find out theintendment becomes necessary and the result of the inquiry maybe decisive. In the latter case, it is necessary to see if the statuteEcreates special right or liability and provides for thedetermination of the right or liability and further lays down that allquestions about the said right and liability shall be determined bythe tribunals so constituted, and whether remedies normallyassociated with actions in civil courts are prescribed by the saidstatute or not.”F

The order of reference notes that Dhulabhai refers to threecategories mentioned in Wolverhampton New Waterworks Co. v.Hawkesford,[27] to the following effect:

“There are three classes of cases in which liability may beGestablished founded upon statute. One is, where there was aliability existing at common law, and that liability is affirmed by astatute which gives special and peculiar form of remedy different

26 Common Cause v. Union of India, (1999) 6 SCC 667 and Agricultural ProduceMarket Committee v. Ashok Harikuni & Another, (2000) 8 SCC 61.H27 9 [1859] 6 C.B. (NS) 336

from the remedy which existed at common law; there, unless thestatute contains words which expressly or by necessary implicationexclude the common law remedy, and the party suing has hiselection to pursue either that or the statutory remedy. The secondclass of cases is, where the statute gives the right to sue merely,but provides no particular form of remedy: there, the party canonly proceed by action at common law. But there is third class,viz. where liability not existing at common law is created by astatute which at the same time gives special and particular remedyfor enforcing it.”

Dhulabhai’s case is not directly applicable as it relates to exclusionof jurisdiction of civil courts, albeit we respectfully agree with the Orderof Reference that the condition No.2 is apposite while examining thequestion of non-arbitrability. Implied legislative intention to excludearbitration can be seen if it appears that the statute creates specialright or liability and provides for determination of the right and liabilityto be dealt with by the specified courts or the tribunals specially constitutedin that behalf and further lays down that all questions about the said rightand liability shall be determined by the court or tribunals so empoweredand vested with exclusive jurisdiction. Therefore, mere creation of aspecific forum as substitute for civil court or specifying the civil court,may not be enough to accept the inference of implicit non- arbitrability.Conferment of jurisdiction on specific court or creation of publicforum though eminently significant, may not be the decisive test to answerand decide whether arbitrability is impliedly barred.34. Implicit non-arbitrability is established when by mandatorylaw the parties are quintessentially barred from contracting out and waivingthe adjudication by the designated court or the specified public forum.There is no choice. The person who insists on the remedy must seek hisremedy before the forum stated in the statute and before no other forum.In Transcore v. Union of India and Another,[28] this Court had examinedthe doctrine of election in the context whether an order under proviso toSection 19(1) of the Recovery of Debts Due to Banks and FinancialInstitutions Act,1993 (the ‘DRT Act’) is condition precedent to takingrecourse to the Securitisation and Reconstruction of Financial Assetsand Enforcement of Security Interest Act, 2002 (the ‘NPA Act’). Foranalysing the scope and remedies under the two Acts, it was held that

ANPA Act is an additional remedy which is not inconsistent with the DRTAct, and reference was made to the doctrine of election in the followingterms:

“64. In the light of the above discussion, we now examine thedoctrine of election. There are three elements of election, namely,Bexistence of two or more remedies; inconsistencies between suchremedies and choice of one of them. If anyone of the threeelements is not there, the doctrine will not apply. According toAmerican Jurisprudence, 2d, Vol. 25, p. 652, if in truth there isonly one remedy, then the doctrine of election does not apply. Inthe present case, as stated above, the NPA Act is an additionalCremedy to the DRT Act. Together they constitute one remedyand, therefore, the doctrine of election does not apply. Evenaccording to Snell’s Principles of Equity (31st Edn., p. 119), thedoctrine of election of remedies is applicable only when there aretwo or more co-existent remedies available to the litigants at theDtime of election which are repugnant and inconsistent. In any event,there is no repugnancy nor inconsistency between the tworemedies, therefore, the doctrine of election has no application.”

Doctrine of election to select arbitration as dispute resolutionmechanism by mutual agreement is available only if the law acceptsEexistence of arbitration as an alternative remedy and freedom to chooseis available. There should not be any inconsistency or repugnancy betweenthe provisions of the mandatory law and arbitration as an alternative.Conversely and in given case when there is repugnancy andinconsistency, the right of choice and election to arbitrate is denied. Thisrequires examining the “text of the statute, the legislative history, andF‘inherent conflict’ between arbitration and the statute’s underlyingpurpose”[29] with reference to the nature and type of special rightsconferred and power and authority given to the courts or public forum toeffectuate and enforce these rights and the orders passed. Whenarbitration cannot enforce and apply such rights or the award cannot beGimplemented and enforced in the manner as provided and mandated bylaw, the right of election to choose arbitration in preference to the courtsor public forum is either completely denied or could be curtailed. Inessence, it is necessary to examine if the statute creates special rightor liability and provides for the determination of each right or liability by

H29 Jennifer L. Peresie, Reducing the Presumption of Arbitrability.

the specified court or the public forum so constituted, and whether theremedies beyond the ordinary domain of the civil courts are prescribed.When the answer is affirmative, arbitration in the absence of specialreason is contraindicated. The dispute is non- arbitrable.

35. In M.D. Frozen Foods Exports Private Limited andOthers v. Hero Fincorp Limited,[30] and following this judgment inIndiabulls Housing Finance Limited v. Deccan Chronicle HoldingsLimited and Others,[31] it has been held that even prior arbitrationproceedings are not bar to proceedings under the NPA Act. The NPAAct sets out an expeditious, procedural methodology enabling the financialinstitutions to take possession and sell secured properties for non-paymentof the dues. Such powers, it is obvious, cannot be exercised through thearbitral proceedings.

36. In Transcore, on the powers of the Debt Recovery Tribunal(DRT) under the DRT Act, it was observed:

“18. On analysing the above provisions of the DRT Act, we findthat the said Act is complete code by itself as far as recovery ofdebt is concerned. It provides for various modes of recovery. Itincorporates even the provisions of the Second and ThirdSchedules to the Income Tax Act, 1961. Therefore, the debt dueunder the recovery certificate can be recovered in various ways.The remedies mentioned therein are complementary to each other.The DRT Act provides for adjudication. It provides for adjudicationof disputes as far as the debt due is concerned. It covers securedas well as unsecured debts. However, it does not rule out theapplicability of the provisions of the TP Act, in particular, Sections69 and 69-A of that Act. Further, in cases where the debt is securedby pledge of shares or immovable properties, with the passageof time and delay in the DRT proceedings, the value of the pledgedassets or mortgaged properties invariably falls. On account ofinflation, the value of the assets in the hands of the bank/FIinvariably depletes which, in turn, leads to asset-liability mismatch.These contingencies are not taken care of by the DRT Act and,therefore, Parliament had to enact the NPA Act, 2002.”

Consistent with the above, observations in Transcore on the power

30 (2017) 16 SCC 741

31 (2018) 14 SCC 783

DEF

Aof the DRT conferred by the DRT Act and the principle enunciated inthe present judgment, we must overrule the judgment of the Full Benchof the Delhi High Court in HDFC Bank Ltd. v. Satpal Singh Bakshi,[32]which holds that matters covered under the DRT Act are arbitrable. It isnecessary to overrule this decision and clarify the legal position as thedecision in HDFC Bank Ltd. has been referred to in M.D. FrozenBFoods Exports Private Limited, but not examined in light of the legalprinciples relating to non-arbitrability. Decision in HDFC Bank Ltd.holds that only actions in rem are non-arbitrable, which as elucidatedabove is the correct legal position. However, non-arbitrability may arisein case the implicit prohibition in the statute, conferring and creatingCspecial rights to be adjudicated by the courts/public fora, which rightincluding enforcement of order/provisions cannot be enforced and appliedin case of arbitration. To hold that the claims of banks and financialinstitutions covered under the DRT Act are arbitrable would deprive anddeny these institutions of the specific rights including the modes ofrecovery specified in the DRT Act. Therefore, the claims covered byDthe DRT Act are non-arbitrable as there is prohibition against waiverof jurisdiction of the DRT by necessary implication. The legislation hasoverwritten the contractual right to arbitration.

37. In Natraj Studios (P) Ltd., case under the Arbitration

Act,1940, it was observed that on broader consideration of public policyEthe disputes were non-arbitrable. In N. Radhakrishnan v. MaestroEngineers and Others,[33] reliance was placed on the followingobservations in Abdul Kadir Samshuddin Bubere v. MadhavPrabharkar Oak and Another:[34]

“There is no doubt that when serious allegation of fraud is laidFagainst the party and the party who charged with the fraud desiresthat the matter should be tried in the open court it would be sufficientcause for the court for the court not to order an arbitrationagreement to be filed and not to make the reference.”

N. Radhakrishnan upheld the order rejecting the applicationGunder Section 8 of the Arbitration Act on the ground that it would be infurtherance of justice that the allegations as to fraud and manipulation offinances in the partnership firm are tried in the court of law which is

32 2013 (134) DRJ 566 (FB)

33 (2010) 1 SCC 72H34 AIR 1962 SC 406

more competent and has means to decide complicated matter. However,in A. Ayyasamy, notwithstanding the allegations of fraud, the civil appealwas allowed, the civil suit was stayed and reference to arbitration underSection 8 of the Arbitration Act was made. A.K. Sikri J. held that theArbitration Act does not make any specific provision for excluding anycategory of disputes terming them as non-arbitrable but there are numberof pronouncements which hold that fraud is one such category wherethe dispute would be considered as non-arbitrable. Elucidating on theexclusion, he observed that pleading of mere allegation of fraud by oneparty is not enough. The allegation of fraud should be such which makesa virtual case of criminal offence. On the question of non-arbitrabilitywhen there are allegations of fraud, he observed:

“25... finds that there are very serious allegations of fraud whichmake virtual case of criminal offense or where allegations offraud are so complicated that it becomes absolutely essential thatsuch complex issues can be decided only by the civil court on theappreciation of the voluminous evidence that needs to be produced,the court can sidetrack the agreement by dismissing the applicationunder Section 8 and proceed with the suit on merits. It can be sodone also in those cases where there are serious allegations offorgery/fabrication of documents in support of the plea of fraudor where fraud is alleged against the arbitration provision itself oris of such nature that permeates the entire contract, includingthe agreement to arbitrate, meaning thereby in those cases wherefraud goes to the validity of the contract itself of the entire contractwhich contains the arbitration clause or the validity of the arbitrationclause itself...Such categories of non-arbitrable subjects are carvedout by the courts, keeping in mind the principle of common lawthat certain disputes which are of public nature, etc. are not capableof adjudication and settlement by arbitration and for resolution ofsuch disputes, courts i.e. public fora, are better suited than privateforum of arbitration...”

D.Y. Chandrachud, J. in his concurring judgment unclasped themandatory nature of Section 8 of the Arbitration Act to observe thatallegations of fraud can be made subject matter of arbitration by relyingon Russell on Arbitration, Redfer Hunter on International Arbitrationand Gary B. Born in International Commercial Arbitration. Reliancewas placed on the principle of separation and legal effect of the doctrineof competence- competence, to observe:

A“13. Once an application in due compliance with Section 8 of theArbitration Act is filed, the approach of the civil court should benot to see whether the court has jurisdiction. It should be to seewhether its jurisdiction has been ousted. There is lot of differencebetween the two approaches. Once it is brought to the notice ofthe court that its jurisdiction has been taken away in terms of theBprocedure prescribed under special statute, the civil court shouldfirst see whether there is ouster of jurisdiction in terms orcompliance with the procedure under the special statute. Thegeneral law should yield to the special law — generaliaspecialibus non derogant. In such situation, the approach shallCnot be to see whether there is still jurisdiction in the civil courtunder the general law. Such approaches would only delay theresolution of disputes and complicate the redressal of grievanceand of course unnecessarily increase the pendency in the court.”

xxxx

43. Hence, the allegations of criminal wrongdoing or of statutoryviolation would not detract from the jurisdiction of the ArbitralTribunal to resolve dispute arising out of civil or contractualrelationship on the basis of the jurisdiction conferred by thearbitration agreement.”

EElucidating and summarising the legal position, D.Y.ChandrachudJ. has observed:

“53. The Arbitration and Conciliation Act, 1996, should in my viewbe interpreted so as to bring in line the principles underlying itsinterpretation in manner that is consistent with prevailingFapproaches in the common law world. Jurisprudence in India mustevolve towards strengthening the institutional efficacy ofarbitration. Deference to forum chosen by parties as completeremedy for resolving all their claims is but part of that evolution.Minimising the intervention of courts is again recognition of theGsame principle.”

38. Arbitrability as noticed above in essence is matter of nationalpolicy.[35 ]A statute, on the basis of public policy, can expressly or by

35 Second Look at Arbitrability: Approaches to Arbitration in the United States,HSwitzerland and Germany by Patrick M. Baron and Stefan Liniger

implication restrict or prohibit arbitrability of disputes. To this extent thereis uniformity and consensus. However, N. Radhakrishnan whileaccepting that the dispute may be arbitrable under the applicablemandatory law, holds that the dispute would be non-arbitrable on publicpolicy consideration if it relates to serious allegations of fraud. The twoviews in A. Ayyasamy exposit the predicament on the role of publicpolicy in deciding the question of law of non-arbitrability. Whether asubject matter or dispute should be held as non-arbitrable on publicpolicy is vexed and not free from difficulty as reflected in the strongopinions expressed in the judgments. Indeed, under the Arbitration Act,1940, the case law in view of the statutory discretion under sub- section(4) to Sections 20 and 34 clearly supports and accepts the role andrelevance of public policy. Legal position under the Arbitration Act asexamined under the heading ‘Who decides non- arbitrability’, however,is different.

39. We begin by examining sub-clauses (i) and (ii) of clause (b) toSub-section (2) to Section 34, which read as under:

“34. Application for setting aside arbitral award. –

xxxxxx

(2) An arbitral award may be set aside by the Court only if –

(a) ...

(b) the Court finds that––

(i) the subject-matter of the dispute is not capable of settlementby arbitration under the law for the time being in fore, or

(ii) the arbitral award is in conflict with the public policy ofIndia.

Explanation 1. - For the avoidance of any doubt, it is clarified thatan award is in conflict with the public policy of India, only if, ––

(i) the making of the award was induced or affected by fraud

or corruption or was in violation of section 75 or section 81; or

(ii) it is in contravention with the fundamental policy of Indianlaw; or

(iii) it is in conflict with the most basic notions of morality orjustice.

AExplanation 2. - For the avoidance of doubt, the test as to whetherthere is contravention with the fundamental policy of Indian lawshall not entail review on the merits of the dispute.”

Section 34(2)(b) consists of two sub-clauses both accrediting thecourt with the power to set aside an award. Under sub-clause (i) anBaward is liable to be set aside when the subject matter is not capable ofsettlement by arbitration under law for the time being in force. Undersub-clause (ii) an award can be set aside if it is in conflict with the publicpolicy of India. As per Explanation No. 1, an award is in conflict with thepublic policy of India only if it was induced or affected by fraud,corruption, etc. or it is in contravention with the fundamental policy ofCIndian law or is in conflict with the most basic notions of morality orjustice. Explanation 2 cautions the courts not to review on the merits ofthe case while examining the question whether an award is incontravention with the fundamental policy of law. Therefore, conflictwith the public policy of India and subject matter of dispute not capableDof settlement by arbitration, are two separate and independent groundson which the court can set aside the award. Reference to public policyin Booz Allen & Hamilton Inc. and in the present matter and non-arbitrability of the subject matter is completely different and has nothingin common with the public policy of India referred to in sub-clause (ii) ofSection 34(2)(b) of the Arbitration Act. Public policy in the context ofEnon-arbitrability refers to public policy as reflected in the enactment,that is, whether the enactment confers exclusive jurisdiction to the specifiedcourt or the special forum and prohibits recourse to arbitration. Publicpolicy in the context of sub-clause(ii) to Section 34(2)(b) refers to thepublic policy of the enactment, defining and fixing rights and obligations,Fand application of those rights and obligations by the arbitrator. Statutesunfailingly have public purpose or policy which is the basis and purposebehind the legislation. Application of mandatory law to the merits of thecase do not imply that the right to arbitrate is taken away. Mandatorylaw may require particular substantive rule to be applied, but this would

not preclude arbitration. Implied non-arbitrability requires prohibitionGagainst waiver of jurisdiction, which happens when statute gives specialrights or obligations and creates or stipulates an exclusive forum foradjudication and enforcement. An arbitrator, like the court, is equallybound by the public policy behind the statute while examining the claimon merits. The public policy in case of non-arbitrability would relate toHconferment of exclusive jurisdiction on the court or the special forum set

up by law for decision making. Non-arbitrability question cannot beanswered by examining whether the statute has public policy objectivewhich invariably every statue would have. There is general presumptionin favour of arbitrability, which is not excluded simply because the disputeis permeated by applicability of mandatory law. Violation of public policyby the arbitrator could well result in setting aside the award on the groundof failure to follow the fundamental policy of law in India, but not on theground that the subject matter of the dispute was non-arbitrable.40. However, the above discussion would not be complete answerto N. Radhakrishnan that if justice demands, then notwithstanding thearbitration clause, the dispute would be tried in the open court. To acceptthis reasoning one would have to agree that arbitration is flawed andcompromised dispute resolution mechanism that can be forgone whenpublic interest or public policy demands the dispute should be tried anddecided in the court of law. The public policy argument proceeds on thefoundation and principle that arbitration is inferior to court adjudicationas: (i) fact finding process in arbitration is not equivalent to judicial factfinding, which is far more comprehensive and in-depth; (ii) there is limitedor lack of reasoning in awards; (iii) arbitrators enjoy and exerciseextensive and unhindered powers and therefore are prone in makingarbitrary and despotic decisions; (iv) there is no appeal process inarbitration which combined with the (iii) above and limited review of anarbitral award in post-award court proceedings, arbitration may havedevastating consequences for the losing party and undermines justice;(v) arbitration proceedings are usually private and confidential; (vi)arbitrators are unfit to address issues arising out of the economic powerdisparity or social concerns;[36] (vii) business and industry, by adoptingand compulsorily applying arbitration process, leave the vulnerable andweaker sections with little or no meaningful choice but to acceptarbitration. few people realize and understand the importance of lossof their right to access the court of law or public forum, which areimpartial, just and fair;[37] and (viii) arbitration is expensive and costly incomparison to court adjudication.[38]

36 (i) to (vi) from Prof. Stavros Brekoulakis – On Arbitrability: Persisting Misconceptionsand New Area of Concern.

37 (vii) from the preamble of the text of the bill of 2007 Arbitration Fairness Act as waswritten by the sponsor and submitted to the House for consideration

38 Union of India v. Singh Builders Syndicate, (2009) 4 SCC 523.

ABC

A41. While it would not be correct to dispel the grounds as mereconjectures and baseless, it would be grossly irrational and completelywrong to mistrust and treat arbitration as flawed and inferior adjudicationprocedure unfit to deal with the public policy aspects of legislation.Arbitrators, like the courts, are equally bound to resolve and decidedisputes in accordance with the public policy of the law. Possibility ofBfailure to abide by public policy consideration in legislation, whichotherwise does not expressly or by necessary implication excludearbitration, cannot form the basis to overwrite and nullify the arbitrationagreement. This would be contrary to and defeat the legislative intentreflected in the public policy objective behind the Arbitration Act.CArbitration has considerable advantages as it gives freedom to the partiesto choose an arbitrator of their choice, and it is informal, flexible andquick. Simplicity, informality and expedition are hallmarks of arbitration.Arbitrators are required to be impartial and independent, adhere to naturaljustice, and follow fair and just procedure. Arbitrators are normallyexperts in the subject and perform their tasks by referring to facts,Devidence, and relevant case law. Complexity is not sufficient to ward offarbitration. In terms of the mandate of Section 89 of the Civil ProcedureCode and the object and purpose behind the Arbitration Act and themandatory language of Sections 8 and 11, the mutually agreed arbitrationclauses must be enforced. The language of Sections 8 and 11 of theEArbitration Act are peremptory in nature. Arbitration Act has been enactedto promote arbitration as transparent, fair, and just alternative to courtadjudication. Public policy is to encourage and strengthen arbitration toresolve and settle economic, commercial and civil disputes. Amendmentsfrom time to time have addressed the issues and corrected theinadequacies and flaws in the arbitration procedure. It is for theFstakeholders, including the arbitrators, to assure that the arbitration is asimpartial, just, and fair as court adjudication. It is also the duty of thecourts at the post-award stage to selectively yet effectively exercise thelimited jurisdiction, within the four corners of Section 34(2)(b)(ii) readwith Explanation 1 and 2 and check any conflict with the fundamentalGpolicy of the applicable law. We would subsequently refer to the ‘secondlook’[39] principle which is applicable in three specific situations dealingwith arbitrability as per the mandate of Section 34 of the Arbitration Act.

39 Mitsubishi Motors Corp v. Soler Chrysler Plymouth Inc, 473 U.S. 614 S Ct 3346H(1985) (U.S. Supreme Court, 2 July 1985)

42. Recently, the Supreme Court of Canada in TELUSCommunications Inc. v. Avraham Wellman,[40] while conceding thatarbitration as method of dispute resolution was met with “overt hostility”for long time on public policy grounds as it ousts jurisdiction of courts,observed that the new legislation, the Arbitration Act of 1991, marks adeparture as it encourages parties to adopt arbitration in commercialand other matters. By putting party autonomy on high pedestal, theAct mandates that the parties to valid arbitration agreement must abideby the consensual and agreed mode of dispute resolution. The courtsmust show due respect to arbitration agreements particularly incommercial settings by staying the court proceedings, unless the legislativelanguage is to the contrary. The principle of party autonomy goes handin hand with the principle of limited court intervention, this being thefundamental principle underlying modern arbitration law. Party autonomyis weaker in non-negotiated “take it or leave it” contracts and, therefore,the legislature can through statutes shield the weakest and vulnerablecontracting parties like consumers. This is not so in negotiated agreementsor even in adhesion contracts having an arbitration clause in commercialsettings. Virtues of commercial and civil arbitration have been recognisedand accepted and the courts even encourage the use of arbitration.

43. recent judgment of this Court in Avitel Post Studioz Limitedand Others v. HSBC PI Holdings (Mauritius) Limited[41]has examinedthe law on invocation of ‘fraud exception’ in great detail and holds thatN. Radhakrishnan as precedent has no legs to stand on. Werespectfully concur with the said view and also the observations made inparagraph 14 of the judgment in Avitel Post Studioz Limited, whichquotes observations in Rashid Raza v. Sadaf Akhthar[42]:

“4. The principles of law laid down in this appeal make distinctionbetween serious allegations of forgery/ fabrication in support ofthe plea of fraud as opposed to “simple allegations”. Two workingtests laid down in para 25 are: (1) does this plea permeate theentire contract and above all, the agreement of arbitration,rendering it void, or (2) whether the allegations of fraud touchupon the internal affairs of the parties inter se having no implicationin the public domain.”

40 (2019) SCC 19 (CanLII)

41 Civil Appeal No. 5145 of 2016 and connected matters, decided on 19.08.2020

42 (2019) 8 SCC 710

Ato observe in Avitel Post Studioz Limited:

“it is clear that serious allegations of fraud arise only if either ofthe two tests laid down are satisfied and not otherwise. The firsttest is satisfied only when it can be said that the arbitration clauseor agreement itself cannot be said to exist in clear case in whichBthe court finds that the party against whom breach is alleged cannotbe said to have entered into the agreement relating to arbitrationat all. The second test can be said to have been met in cases inwhich allegations are made against the State or its instrumentalitiesof arbitrary, fraudulent, or mala fide conduct, thus, necessitatingthe hearing of the case by writ court in which questions areCraised which are not predominantly questions arising from thecontract itself or breach thereof but questions arising in the publiclaw domain.”

The judgment in Avitel Post Studioz Limited interprets Section17 of the Contract Act to hold that Section 17 would apply if the contractDitself is obtained by fraud or cheating. Thereby, distinction is madebetween contract obtained by fraud, and post- contract fraud andcheating. The latter would fall outside Section 17 of the Contract Actand, therefore, the remedy for damages would be available and not theremedy for treating the contract itself as void.E44. In v.

44. In Deccan Paper Mills Co. Ltd. v. Regency MahavirProperties[43], legal proceedings for cancellation of documents underSection 31 of the Specific Relief Act, 1963 were held to be actions inpersonam and not actions in rem. Significantly, the judgment refers tothe definition of action in rem by R.H. Graveson (Conflict of Laws 98,F7th ed. 1974), which reads as under:

“An action in rem is one in which the judgment of the Courtdetermines the title to property and the rights of the parties, notmerely as between themselves, but also as against all persons atany time dealing with them or with the property upon which theGCourt had adjudicated.”45. In view of the above discussion, we would like to propound afour- fold test for determining when the subject matter of dispute in anarbitration agreement is not arbitrable:

(1) when cause of action and subject matter of the dispute relatesto actions in rem, that do not pertain to subordinate rights inpersonam that arise from rights in rem.

(2) when cause of action and subject matter of the dispute affectsthird party rights; have erga omnes effect; require centralizedadjudication, and mutual adjudication would not be appropriateand enforceable;

(3) when cause of action and subject matter of the dispute relatesto inalienable sovereign and public interest functions of the Stateand hence mutual adjudication would be unenforceable; and

(4) when the subject-matter of the dispute is expressly or bynecessary implication non-arbitrable as per mandatory statute(s).

These tests are not watertight compartments; they dovetail andoverlap, albeit when applied holistically and pragmatically will help andassist in determining and ascertaining with great degree of certaintywhen as per law in India, dispute or subject matter is non-arbitrable.Only when the answer is affirmative that the subject matter of the disputewould be non-arbitrable.

However, the aforesaid principles have to be applied with careand caution as observed in Olympus Superstructures Pvt. Ltd.:

“35...Reference is made there to certain disputes like criminaloffences of public nature, disputes arising out of illegalagreements and disputes relating to status, such as divorce, whichcannot be referred to arbitration. It has, however, been held thatif in respect of fats relating to criminal matter, say, physicalinjury, if there is right to damages for personal injury, then sucha dispute can be referred to arbitration (Keir v. Leeman). Similarly,it has been held that husband and wife may refer to arbitrationthe terms on which they shall separate, because they can make avalid agreement between themselves on that matter (Soilleux v.Herbst, Wilson v. Wilson and Cahill v. Cahill).”

46. Applying the above principles to determine non-arbitrability, itis apparent that insolvency or intracompany disputes have to be addressedby centralized forum, be the court or special forum, which would bemore efficient and has complete jurisdiction to efficaciously and fullydispose of the entire matter. They are also actions in rem. Similarly,

Agrant and issue of patents and registration of trademarks are exclusivematters falling within the sovereign or government functions and haveerga omnes effect. Such grants confer monopoly rights. They are non-arbitrable. Criminal cases again are not arbitrable as they relate tosovereign functions of the State. Further, violations of criminal law areoffenses against the State and not just against the victim. MatrimonialBdisputes relating to the dissolution of marriage, restitution of conjugalrights etc. are not arbitrable as they fall within the ambit of sovereignfunctions and do not have any commercial and economic value. Thedecisions have erga omnes effect. Matters relating to probate,testamentary matter etc. are actions in rem and are declaration to theCworld at large and hence are non-arbitrable.

47. In view of the aforesaid discussions, we overrule the ratio inN. Radhakrishnan inter alia observing that allegations of fraud canbe made subject matter of arbitration when they relate to civil dispute.This is subject to the caveat that fraud, which would vitiate and invalidateDthe arbitration clause, is an aspect relating to non- arbitrability. We havealso set aside the Full Bench decision of the Delhi High Court in thecase of HDFC Bank Ltd. which holds that the disputes which are to beadjudicated by the DRT under the DRT Act are arbitrable. They arenon-arbitrable.E48. Landlord-tenant disputes governed by the Transfer of PropertyAct are arbitrable as they are not actions in rem but pertain to subordinaterights in personam that arise from rights in rem. Such actions normallywould not affect third-party rights or have erga omnes affect or requirecentralized adjudication. An award passed deciding landlord-tenantdisputes can be executed and enforced like decree of the civil court.FLandlord-tenant disputes do not relate to inalienable and sovereignfunctions of the State. The provisions of the Transfer of Property Act donot expressly or by necessary implication bar arbitration. Transfer ofProperty Act, like all other Acts, has public purpose, that is, to regulatelandlord- tenant relationships and the arbitrator would be bound by theGprovisions, including provisions which enure and protect the tenants.

49. In view of the aforesaid, we overrule the ratio laid down inHimangni Enterprises and hold that landlord-tenant disputes arearbitrable as the Transfer of Property Act does not forbid or foreclosearbitration. However, landlord-tenant disputes covered and governed byHrent control legislation would not be arbitrable when specific court or

forum has been given exclusive jurisdiction to apply and decide specialrights and obligations. Such rights and obligations can only be adjudicatedand enforced by the specified court/forum, and not through arbitration.

Who decides non-arbitrability?

50. Lord Mustill’s well-known comparison of the relationshipbetween courts and arbitrators to relay race, reads:

“Ideally, the handling of arbitrable disputes should resemble relayrace. In the initial stages, before the arbitrators are seized of thedispute, the baton is in the grasp of the court; for at that stagethere is no other organisation which could take steps to preventthe arbitration agreement for being ineffectual. When the arbitratorstake charge they take over the baton and retain it until they havemade an award. At this point, having no longer function to fill,the arbitrators hand back the baton so that the court can in caseof need lend its coercive powers to the enforcement of the award.”

Thus, the legal problem of allocation of decision-making authoritybetween courts and arbitral tribunals.

51. Issue of non-arbitrability can be raised at three stages. First,before the court on an application for reference under Section 11 or forstay of pending judicial proceedings and reference under Section 8 ofthe Arbitration Act; secondly, before the arbitral tribunal during the courseof the arbitration proceedings; or thirdly, before the court at the stage ofthe challenge to the award or its enforcement. Therefore, the question –‘Who decides non- arbitrability?’ and, in particular, the jurisdiction ofthe court at the first look stage, that is, the referral stage.

52. Who decides the question of non-arbitrability? - jurisdictionalquestion is technical legal issue, and requires clarity when applied tofacts to avoid bootstrapping and confusion. The doubt as to who has thejurisdiction to decide could hinder, stray, and delay many arbitrationproceedings. Unfortunately, who decides non-arbitrability remains avexed question that does not have straightforward universal answeras would be apparent from opinions in the at-variance Indian case lawson this subject. To some extent, the answer depends on how muchjurisdiction the enactment gives to the arbitrator to decide their ownjurisdiction as well as the court’s jurisdiction at the reference stage andin the post-award proceedings. It also depends upon the jurisdictionbestowed by the enactment, viz. the facet of non-arbitrability in question,

Athe scope of the arbitration agreement and authority conferred on thearbitrator.

53. Under the Arbitration Act, 1940, the jurisdiction to settle anddecide non-arbitrability issues relating to existence, validity, scope aswell as whether the subject matter was capable of arbitration, withBpossible exception in case of termination, novation, frustration and ‘accordand satisfaction’ when contested on facts, was determined and decidedat the first or at the reference stage by the courts. The principle beingthat the court should be satisfied about the existence of valid arbitrationagreement and that the disputes have arisen with regard to the subjectmatter of the arbitration agreement. At this stage, the court would be,Chowever, not concerned with the merits or sustainability of the disputes.Despite best efforts to contain obstructive tactics, adjudication and finaldecision of non-arbitrability issues at the reference stage would invariablystop, derail and thwart the proceedings in the courts for years.

54. The Arbitration Act based upon the UNCITRAL Model LawDintroduced an entirely new regimen with the objective to promotearbitration in commercial and economic matters as an alternative disputeresolution mechanism that is fair, responsive and efficient to contemporaryrequirements. One of the primary objectives of the Arbitration Act is toreduce and minimize the supervisory role of courts. Accordingly, thestatutory powers of the arbitral tribunal to deal with and decideEjurisdictional issues of non-arbitrability were amplified and the principlesof separation and competence- competence were incorporated, whilethe courts retained some power to have ‘second look’ in the post-award challenge proceeding. On the jurisdiction of the court at the referralstage, views of this Court have differed and there have been statutoryamendments to modify and obliterate the legal effect of the courtFdecisions.

55. The legal position as to who decides the question of non-arbitrability under the Arbitration Act can be divided into four phases.The first phase was from the enforcement of the Arbitration Act till thedecision of the Constitution Bench of seven Judges in Patel EngineeringGLtd. on 26th October 2005. For nearly ten years, the ratio expressed inKonkan Railway Corpn. Ltd. and Others v. Mehul Construction Co.,[44]affirmed by the Constitution Bench of five Judges in Konkan RailwayConstruction Ltd. and Another v. Rani Construction Pvt. Ltd.,[45] had

44 (2000) 7 SCC 201H45 (2002) 2 SCC 388

prevailed. The second phase commenced with the decision in PatelEngineering Ltd. till the legislative amendments, which were made tosubstantially reduce court interference and overrule the legal effect ofPatel Engineering Ltd. vide Act 3 of 2016 with retrospective effectfrom 23rd October 2015. The third phase commenced with effect from23rd October 2015 and continued till the enactment of Act 33 of 2019with effect from 9th August 2019, from where commenced the fourthphase, with clear intent to promote institutionalized arbitration ratherthan ad hoc arbitration. The amendments introduced by Act 33 of 2019have been partially implemented and enforced. In the present case, weare primarily concerned with the legal position in the third phase witheffect from 23rd October 2015 when amendments by Act 3 of 2016became operative.

56. We begin by reproducing the relevant statutory provisions,namely, Sections 8, 11, 16, sub-sections (1) and (2) to Section 34 includingclause (b), which has been partly quoted in paragraph 39 above, andsub-sections (1), (2), (3) to Section 43 of the Arbitration Act.

For the sake of clarity and convenience, we are reproducing belowthe provisions of Sections 8 and 11 of the Arbitration Act in tabulatedform as Sections 8 and 11 were amended by Act 3 of 2016 withretrospective effect from 23rd October, 2015 and Section 11 hasundergone another amendment vide Act 33 of 2019 with effect from 9thAugust, 2019.

Section 8, pre and post Act 3 of 2016, read as under:

SECTION 8SECTION 8(before Act 3 of 2016)(post Act 3 of 2016)8. Power to refer parties to 8. Power to refer parties to arbitration where there arbitration where there is an is an arbitration agreement.—arbitration agreement. —(1) judicial authority before (1) judicial authority, before which an action is brought which an action is brought in in matter which is the subject of an arbitration matter which is the subject of an agreement shall, if party to the arbitration agreement or arbitration agreement shall, if any person claiming through or under him, so applies not party so applies not later than later than the date of submitting his first statement on the when submitting his first substance of the dispute, then, notwithstanding any statement on the substance of the judgment, decree or order of the Supreme Court or any dispute, refer the parties to court, refer the parties to arbitration unless it finds that arbitration.prima facie no valid arbitration agreement exists.

1084SUPREME COURT REPORTS[2020] 11 S.C.R.A(6) Where, under an (6) Where, under an (6) Where, under an appointment procedure appointment procedure appointment procedure agreed upon by the parties,––agreed upon by the parties,––agreed upon by the parties,—(a) party fails to act as (a) party fails to act as (a) party fails to act as required under thatrequired under that required under thatprocedure; orprocedure; orprocedure; or(b) the parties, or the two (b) the parties, or the two (b) the parties, or the two Bappointed arbitrators, fail to appointed arbitrators, fail to appointed arbitrators, fail to reach an agreement expected reach an agreement expected reach an agreement expected of them under that procedure; of them under that procedure; of them under that procedure; ororor(c) person, including an (c) person, including an (c) person, including an institution, fails to perform institution, fails to perform institution, fails to perform any function entrusted to him any function entrusted to him any function entrusted to him or it under that procedure, or it under that procedure, or it under that procedure, Cparty may request the Chief party may request the [the appointment shall be Justice or any person or Supreme Court or, as the case made, on an application of the institution designated by him may be, the High Court or any party, by the arbitral to take the necessary measure, person or institution institution designated by the unless the agreement on the designated by such Court to Supreme Court, in case of appointment procedure take the necessary measure, international commercial provides other means for unless the agreement on the arbitration, or by the High Dsecuring the appointment.appointment procedure Court, in case of arbitrations provides other means for other than international securing the appointment.commercial arbitration, as the case may be] to take the necessary measure, unless the agreement on theappointment procedure provides other means for Esecuring the appointment.(6-A) The Supreme Court or, (6-A) [* * *]as the case may be, the High Court, while considering any application under sub-sectionNA(4) or sub-section (5) or sub-section (6), shall,Fnotwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.(6-B) The designation of any (6-B) The designation of any person or institution by the person or institution by the GSupreme Court or, as the case Supreme Court or, as the case may be, the High Court, for may be, the High Court, for the NA the purposes of this section purposes of this section shallshall not be regarded as not be regarded as delegation delegation of judicial power of judicial power by the by the Supreme Court or the Supreme Court or the High High Court. court.]

1086SUPREME COURT REPORTS[2020] 11 S.C.R.A(11) Where more than one (11) Where more than one (11) Where more than one request has been made under request has been made under request has been made under sub-section (4) or sub-section sub-section (4) or sub-section sub-section (4) or sub-section (5) or sub-section (6) to the (5) or sub-section (6) to 3 (5) or sub-section (6) to Chief Justices of different different High Courts or their different arbitral institutions, High Courts or their designates, the High Court or the arbitral institution to designates, the Chief Justice its designate to whom the which the request has been or his designate to whom the request has been first made first made under the relevant Brequest has been first made under the relevant sub-section sub- section shall be under the relevant sub-section shall alone be competent to competent to appoint. shall alone be competent to decide on the request decide on the request. (12) (a) Where the matters (12) (a) Where the matters (12)Where the matter referred to in sub-sections (4), referred to in sub-sections (4), referred to in sub-sections (5), (6), (7), (8) and (10) arise (5), (6), (7), (8) and sub- (4), (5), (6) and (8) arise in an in an international section (10) arise in an international commercial Ccommercial arbitration, the international commercial arbitration or any other reference to Chief Justice in arbitration, the reference to arbitration, the reference to those sub- sections shall be the Supreme Court or, as the the arbitral institution in construed as reference to the case may be, the High Court those sub-sections shall be Chief Justice of India in those sub-sections shall be construed as reference to (b) Where the matters referred construed as reference to the the arbitral institution to in sub-sections (4), (5), (6), Supreme Court; and (b) where designated under sub-section D(7), (8) and (10) arise the matters referred to in sub-(3-A). in any other arbitration, the sections (4), (5), (6), reference to Chief Justice in (7), (8) and sub-section (10) those sub-sections shall be arise in any other arbitration, construed as reference to the the reference to the Supreme Chief Justice of the High Court or, as the case may be, Court within whose local the High Court in those limits the principal Civil subsections shall be construed ECourt referred to in clause (e) as reference to the High of sub-section (1) of section 2 Court within whose local is situate and, where the High limits the principal Civil Court itself is the Court Court referred to in clause (e) referred to in that clause, to of sub-section (1) of section 2 the Chief Justice of that High is situate, and where the High Court. Court itself is the Court referred to in that clause, to Fthat High Court.(13) An application made (13) An application made under this section for under this section for appointment of an arbitrator appointment of an arbitrator or arbitrators shall be or arbitrators shall be disposed of by the Supreme disposed of by the arbitral Court or the High Court or the institution within period of person or institution thirty days from the date of GNA designated by such Court, as service of notice on the the case may be, as opposite party. expeditiously as possible and an endeavour shall be made to dispose of the matter within period of sixty days from the date of service of notice on Hthe opposite party.

VIDYA DROLIA AND OTHERS v.

DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

(14) For the purpose of (14) The arbitral institution Adetermination of the fees of shall determine the fees of the arbitral tribunal and the the arbitral tribunal and the manner of its payment to the manner of its payment to the arbitral tribunal, the High arbitral tribunal subject to the Court may frame such rules as rates specified in the Fourth may be necessary, after taking Schedule. into consideration the rates Bspecified in the Fourth Schedule. Explanation.–– For NA the removal of doubts, it is hereby clarified that this sub- section shall not apply to international commercial arbitration and in arbitrations C(other than international commercial arbitration) in case where parties have agreed for determination of fees as per the rules of an arbitral institution. xxxxxxD

Section 16 of the Arbitration Act reads as under:

“16. Competence of arbitral tribunal to rule on itsjurisdiction.- (1) The arbitral tribunal may rule on its ownjurisdiction, including ruling on any objections with respect to theexistence or validity of the arbitration agreement, and for thatpurpose, -

(a) an arbitration clause which forms part of contract shall betreated as an agreement independent of the other terms of thecontract; and

(b) decision by the arbitral tribunal that the contract is null andvoid shall not entail ipso jure the invalidity of the arbitration clause.

(2) plea that the arbitral tribunal does not have jurisdiction shallbe raised not later than the submission of the statement of defense;however, party shall not be precluded from raising such pleamerely because that he has appointed, or participated in theappointment of, an arbitrator.

(3) plea that the arbitral tribunal is exceeding the scope of itsauthority shall be raised as soon as the matter alleged to be beyondthe scope of its authority is raised during the arbitral proceedings.

A(4) The arbitral tribunal may, in either of the cases referred to insub-section (2) or sub-section (3), admit later plea if it considersthe delay justified.

(5) The arbitral tribunal shall decide on plea referred to in sub-section (2) or sub-section (3) and, where the arbitral tribunal takesBa decision rejecting the plea, continue with the arbitral proceedingsand make an arbitral award.

(6) party aggrieved by such an arbitral award may make anapplication for setting aside such an arbitral award in accordancewith section 34.

Cxxxxxx

Sub-sections (1) and (2) of Section 34 of the Arbitration Act readas under:

“34. Application for setting aside arbitral award. -

D(1) Recourse to Court against an arbitral award may be madeonly by an application for setting aside such award in accordancewith sub-section (2) and sub- section (3).

(2) An arbitral award may be set aside by the Court only if -

(a) the party making the application establishes on the basis of theErecord of the arbitral tribunal that -

(i) party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to whichthe parties have subjected it or, failing any

Findication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper noticeof the appointment of an arbitrator or of the arbitral proceedingsor was otherwise unable to present his case; or

(iv) the arbitral award deals with dispute not contemplated by orGnot falling within the terms of the submission to arbitration, or itcontains decisions on matters beyond the scope of the submissionto arbitration:

Provided that, if the decisions on matters submitted to arbitrationcan be separated from those not so submitted, only that part ofH

the arbitral award which contains decisions on matters not submittedto arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedurewas not in accordance with the agreement of the parties, unlesssuch agreement was in conflict with provision of this Part fromwhich the parties cannot derogate, or, failing such agreement, wasnot in accordance with this Part; or

(b) the Court finds that -

(i) the subject-matter of the dispute is not capable of settlementby arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

Explanation 1 - For the avoidance of any doubt, it is clarified thatan award is in conflict with the public policy of India, only if,—

(i) the making of the award was induced or affected by fraud orcorruption or was in violation of section 75 or section 81; or

(ii) it is in contravention with the fundamental policy of Indianlaw; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2 - For the avoidance of doubt, the test as to whetherthere is contravention with the fundamental policy of Indian lawshall not entail review on the merits of the dispute.”

xxxxxx

Sub-sections (1), (2) and (3) of Section 43 of the Arbitration Actreads as under:

“43. Limitations. – (1) The Limitation Act, 1963 (36 of 1963),shall apply to arbitrations as it applies to proceedings in Courts.

(2) For the purposes of this section and the Limitation Act, 1963(36 of 1963), an arbitration shall be deemed to have commencedon the date referred in section 21.

(3) Where an arbitration agreement to submit future disputes toarbitration provides that any claim to which the agreement appliesshall be barred unless the agreement, and dispute arises to whichthe agreement applies, the Court , if it is of opinion that in the

1090SUPREME COURT REPORTS

Acircumstances of the case undue hardship would otherwise becaused, and notwithstanding that the time so fixed has expired,may on such terms, if any, as the justice of the case may require,extend the time for such period as it thinks proper.”

57. In, Rani Construction Pvt. Ltd. the Constitution BenchBreiterated the earlier view expressed in Mehul Construction Co., thatan order appointing an arbitrator under Section 11 of the Arbitration Actis an administrative order that did not mandate notice and hearing of theother party. Being an administrative order, the Chief Justice or his nomineedo not decide any preliminary issue, or the issue of non-arbitrability, validityand existence of the arbitration agreement, which are to be decided byCthe arbitrator at the first instance.58. However, Constitution Bench of seven Judges vide majorityjudgment in Patel Engineering Ltd. overruled this ratio and held:“38… But the basic requirement for exercising his power underDSection 11(6), is the existence of an arbitration agreement in termsof Section 7 of the Act and the applicant before the Chief Justicebeing shown to be party to such an agreement. It would alsoinclude the question of the existence of jurisdiction in him toentertain the request and an enquiry whether at least part of thecause of action has arisen within the State concerned. Therefore,Ea decision on jurisdiction and on the existence of the arbitrationagreement and of the person making the request being party tothat agreement and the subsistence of an arbitrable dispute requireto be decided and the decision on these aspects is prelude to theChief Justice considering whether the requirements of sub-sectionF(4), sub-section (5) or sub-section (6) of Section 11 are satisfiedwhen approached with the request for appointment of anarbitrator......

39. It is necessary to define what exactly the Chief Justice,approached with an application under Section 11 of the Act, is toGdecide at that stage. Obviously, he has to decide his own jurisdictionin the sense whether the party making the motion has approachedthe right High Court. He has to decide whether there is anarbitration agreement, as defined in the Act and whether the personwho has made the request before him, is party to such anagreement. It is necessary to indicate that he can also decide theHquestion whether the claim was dead one; or long-barred

claim that was sought to be resurrected and whether the partieshave concluded the transaction by recording satisfaction of theirmutual rights and obligations or by receiving the final paymentwithout objection. It may not be possible at that stage, to decidewhether live claim made, is one which comes within the purviewof the arbitration clause. It will be appropriate to leave that questionto be decided by the Arbitral Tribunal on taking evidence, alongwith the merits of the claims involved in the arbitration. The ChiefJustice has to decide whether the applicant has satisfied theconditions for appointing an arbitrator under Section 11(6) of theAct. For the purpose of taking decision on these aspects, theChief Justice can either proceed on the basis of affidavits and thedocuments produced or take such evidence or get such evidencerecorded, as may be necessary. We think that adoption of thisprocedure in the context of the Act would best serve the purposesought to be achieved by the Act of expediting the process ofarbitration, without too many approaches to the court at variousstages of the proceedings before the Arbitral Tribunal.”

In Patel Engineering Ltd., the Court also held that Section 16 ofthe Arbitration Act makes explicit, what is otherwise implicit, that thearbitral tribunal has jurisdiction to rule on its own jurisdiction, includingruling on objections to existence or validity of the arbitration agreement,but this provision would apply when the parties have gone to the arbitraltribunal without recourse to Sections 8 or 11 of the Arbitration Act andnot when the court at the reference stage has decided the jurisdictionalissues. Decision of the court at the referral stage would be final andbinding on the arbitral tribunal. Majority judgment also clarified that whenan arbitral tribunal has been constituted by the parties without havingtaken recourse to court order, the arbitral tribunal will have jurisdictionto decide all matters contemplated by Section 16 of the Arbitration Act.

59. In National Insurance Company Limited v. BogharaPolyfab Private Limited,[46] two Judges’ Bench of this Court, elucidatingon Patel Engineering Ltd., had identified and segregated the issuesthat arise for consideration in an application under Section 11 of theArbitration Act into three categories, viz. (i) issues which the Chief Justiceor his designate is bound to decide; (ii) issues which he can also decide,that is, issues which he may choose to decide or leave it to the arbitral

ABC

Atribunal to decide; and (iii) issues which should be left to the arbitraltribunal to decide, and thereafter had enumerated them as under:

“22.1 The issues (first category) which the Chief Justice/hisdesignate will have to decide are:

(a) Whether the party making the application has approachedthe appropriate High Court.

(b) Whether there is an arbitration agreement and whether theparty who has applied under Section 11 of the Act, is party tosuch an agreement.

22.2 The issues (second category) which the Chief Justice/hisdesignate may choose to decide (or leave them to the decision ofthe Arbitral Tribunal) are:

(a) Whether the claim is dead (long-barred) claim or liveclaim.

(b) Whether the parties have concluded the contract/transactionby recording satisfaction of their mutual rights and obligationor by receiving the final payment without objection.

22.3 The issues (third category) which the Chief Justice/hisdesignate should leave exclusively to the Arbitral Tribunal are:

(i) Whether claim made falls within the arbitration clause (asfor example, matter which is reserved for final decision of adepartmental authority and excepted or excluded fromarbitration).

(ii) Merits or any claim involved in the arbitration.”

23. It is clear from the scheme of the Act as explained by thisCourt in SBP & Co., that in regard to issues falling under thesecond category, if raised in any application under Section 11 ofthe Act, the Chief Justice/his designate may decide them, ifnecessary, by taking evidence. Alternatively, he may leave thoseGissues open with direction to the Arbitral Tribunal to decide thesame. If the Chief Justice or his designate chooses to examinethe issue and decides it, the Arbitral Tribunal cannot re-examinethe same issue. The Chief Justice/his designate will, in choosingwhether he will decide such issue or leave it to the Arbitral Tribunal,be guided by the object of the Act (that is expediting the arbitration

process with minimum judicial intervention). Where allegations offorgery/fabrication are made in regard to the document recordingdischarge of contract by full and final settlement, it would beappropriate if the Chief Justice/his designate decides the issue.”

24. What is however clear is when respondent contends thatthe dispute is not arbitrable on account of discharge of the contractunder settlement agreement or discharge voucher or no-claimcertificate, and the claimant contends that it was obtained by fraud,coercion or undue influence, the issue will have to be decidedeither by the Chief Justice/his designate in the proceedings underSection 11 of the Act or by the Arbitral Tribunal as directed by theorder under Section 11 of the Act. claim for arbitration cannotbe rejected merely or solely on the ground that settlementagreement or discharge voucher had been executed by theclaimant, if its validity is disputed by the claimant.”60. The issues included in the first category were: whether theparty making the application had approached the appropriate High Court,that is, the jurisdictional High Court; whether there is an arbitrationagreement and whether the person who had applied under Section 11 isa party to such agreement. This would include the question whether thedefendant or the opposite party is party to the arbitration agreement orbound by the arbitration agreement in terms of Section 7 of the ArbitrationAct. With respect to the second category, the Court observed that theChief Justice or his designate may decide the issue, if necessary, bytaking evidence or in the alternative may leave the issues open with thedirection to the arbitral tribunal to decide the same. Where the ChiefJustice or his designate examines the issue and decides it, the arbitraltribunal cannot re-examine the issue. The Chief Justice or his designatewould exercise this choice being guided by the object of the ArbitrationAct, that is, expediting the arbitration process with minimum judicialintervention. Where dispute arises on account of settlement agreement,discharge voucher, no claim certificate amounting to discharge or accordand satisfaction, and the other side contends that such certificates wereobtained by fraud, coercion or undue influence, the issue will have to bedecided either by the Chief Justice or his designate in proceedings underSection 11 or by the arbitral tribunal as directed by the order under Section11 of the Act. claim for arbitration cannot be rejected merely or solelyon the ground that the settlement agreement or discharge voucher had

Abeen executed if its validity is disputed. The third category would coverall other questions within the arbitration clause, which the court believedare within the exclusive jurisdiction of the arbitral tribunal at the firststage. This was explained by giving an example of matter purportedlyreserved for the final determination of the departmental authority orexcepted or excluded matters. It would also include merits of any claimBinvolved in arbitration.

61. Paragraph 22 of Boghara Polyfab Private Limited, if readcarefully, states that the factors to be considered while deciding anapplication under Sections 8 and 11 of the Arbitration Act would requirean examination of whether there exists an arbitration agreement, that is,Cthe agreement provides for arbitration proceedings in respect of disputeswhich have arisen between the parties to the agreement. The latterportion requires the court to apply its mind whether the disputes whichhave arisen can be settled by the arbitration agreement. The aforesaidobservations, in our opinion, would be in conformity with the majorityDdecision of the Constitution Bench in Patel Engineering Ltd. whereinit was observed that Sections 8 and 11 of the Arbitration Act arecomplimentary in nature and the Court, while exercising powers underthe two Sections on whether the matter should be referred to arbitration,enjoys equal powers, otherwise, it would lead to an anomalous situationin that judicial authority has wider power under Section 8 but lesserEpower of examination under Section 11.

62. In Arasmeta Captive Power Company Private Limited andAnother v. Lafarge India Private Limited,[47 ]this Court had examinedwhether there is any conflict between Patel Engineering Ltd. andBoghara Polyfab Private Limited on the question of the scope of inquiryFwhile deciding an application under Section 11(6) of the Arbitration Act.The Division Bench in Arasmeta Captive Power Co. Pvt. Ltd. hadreferred to paragraph 39 and sub-para (iv) of paragraph 47 in PatelEngineering Ltd., to observe:

“18. On careful reading of para 39 and Conclusion (iv), as setGout in para 47 of SBP case [SBP & Co. v. Patel Engg. Ltd.,(2005) 8 SCC 618] , it is limpid that for the purpose of setting intomotion the arbitral procedure the Chief Justice or his designate isrequired to decide the issues, namely, (i) territorial jurisdiction, (ii)

existence of an arbitration agreement between the parties, (iii)existence or otherwise of live claim, and (iv) existence of theconditions for exercise of power and further satisfaction as regardsthe qualification of the arbitrator. That apart, under certaincircumstances the Chief Justice or his designate is also requiredto see whether long- barred claim is sought to be restricted andwhether the parties had concluded the transaction by recordingsatisfaction of the mutual rights and obligations or by receivingthe final payment without objection.”

Thereafter, reference was made to the opinion expressed injudgment in Shree Ram Mills Ltd. v. Utility Premises (P) Ltd.,[48] whichit was contented had taken different view from one in Boghara PolyfabPrivate Limited. Disagreeing, the Court referred to the three JudgeBench decision in Chloro Controls India Private Limited which hadconsidered the issue whether there was any variance between ShreeRam Mills Ltd. and Boghara Polyfab Private Limited, to hold thatthere was none and both the judgments are capable of being read inharmony to bring in line with the law declared in Patel EngineeringLtd. In particular, reference was made to the following portion of theparagraph 27 of Shree Ram Mills Ltd. and paragraph 119 of ChloroControls India Private Limited which read as under:

“27. … If the Chief Justice does not, in the strict sense, decidethe issue, in that event it is for him to locate such issue and recordhis satisfaction that such issue exists between the parties. It isonly in that sense that the finding on live issue is given. Even atthe cost of repetition we must state that it is only for the purposeof finding out whether the arbitral procedure has to be startedthat the Chief Justice has to record satisfaction that there remainsa live issue in between the parties. The same thing is about thelimitation which is always mixed question of law and fact. TheChief Justice only has to record his satisfaction that prima faciethe issue has not become dead by the lapse of time or that anyparty to the agreement has not slept over its rights beyond thetime permitted by law to agitate those issues covered by theagreement. It is for this reason that it was pointed out in the aboveparagraph that it would be appropriate sometimes to leave thequestion regarding the live claim to be decided by the Arbitral

Tribunal. All that he has to do is to record his satisfaction that theparties have not closed their rights and the matter has not beenbarred by limitation. Thus, where the Chief Justice comes to afinding that there exists live issue, then naturally this findingwould include finding that the respective claims of the partieshave not become barred by limitation.”

“119. Thus, the Bench while explaining the judgment of this Courtin SBP [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] hasstated that the Chief Justice may not decide certain issues finallyand upon recording satisfaction that prima facie the issue has notbecome dead even leave it for the Arbitral Tribunal to decide.”

In Arasmeta Captive Power Co. (P) Ltd., elucidating on thequestion whether the dispute was arbitrable within the scope of thearbitration clause should be decided by the Chief Justice/designate JudgeDor by the arbitrator, this Court has observed:

“... The stress laid thereon may be innovative but when the learnedJudges themselves have culled out the ratio decidendi in para 39,it is extremely difficult to state that the principle stated in SBP[SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] requires theEChief Justice or his designate to decide the controversy whenraised pertaining to arbitrability of the disputes. Or to express anopinion on excepted matters. Such an inference by syllogisticprocess is likely to usher in catastrophe in jurisprudence developedin this field. We are disposed to think so as it is not apposite topick up line from here and there from the judgment or to chooseFone observation from here or there for raising it to the status of“the ratio decidendi”. That is most likely to pave one on the pathof danger and it is to be scrupulously avoided. The propositionsset out in SBP, in our opinion, have been correctly understood bythe two-Judge Bench in Boghara Polyfab (P) Ltd. and theGsame have been appositely approved by the three-Judge Benchin Chloro Controls India (P) Ltd. and we respectfully concurwith the same. We find no substance in the submission that thesaid decisions require reconsideration, for certain observationsmade in SBP, were not noticed. We may hasten to add that thethree-Judge Bench has been satisfied that the ratio decidendi ofHthe judgment in SBP is really inhered in para 39 of the judgment.”

63. B.N. Srikrishna, J. in Shin-Etsu Chemical Co. Ltd. v. AkshOptifibre Ltd. and Another,[49] case relating to transnational arbitrationunder the New York Convention, had invoked the principle of exvisceribus actus for interpretation of the Arbitration Act. Sub-section(3) of Section 8 of the Arbitration Act envisages that even in situationwhere an application to the court has been made in pending proceeding,arbitration proceedings may commence and continue and even an awardcan be made. Section 16, it was held, incorporates the principles ofseparation and competence-competence thereby clearly indicatingthat the arbitrator can decide his or her own jurisdiction even when thevalidity of the main contract or the arbitration agreement is challenged.Section 34 states that the Court can go into three different aspects ofarbitrability at the post-award stage. Therefore, the Arbitration Act itselfenvisages that the arbitral tribunal should rule on the questions of non-arbitrability subject to the second look of the court post the award. Thishelps in expeditious and quick disposal of matters before the court at thefirst stage while reserving the court’s power to examine the three facetsof arbitrability at the third stage. This also prevents the possibility of amultiplicity of trials, an aspect highlighted in Sukanya Holdings (P)Ltd. On the ambit of the Court’s jurisdiction at the reference stage, itwas observed that the correct approach to the review of the arbitrationagreement would be restricted to prima facie finding that there existsan arbitration agreement that is not null and void, inoperative or incapableof being performed. The key rationale for holding that the courts’ reviewof the arbitration agreement should be limited to prima facie standardis the principle of competence- competence. Further, were the courtsare to be empowered to fully scrutinize the arbitration agreement anarbitral proceeding would have to be stayed until such time that thecourt seized of the matter renders decision on the arbitration agreement.If the finding of the courts would be final and determinative conclusion,then it is obvious that, until such pronouncement is made, the arbitralproceedings would have to hang in abeyance. This evidently would defeatthe credo and ethos of the Arbitration Act, which is to enable expeditiousarbitration without avoidable intervention by the judicial authorities. As aresult, the approach to be adopted at the reference stage is whether it is‘plainly arguable’ that the arbitration agreement is in existence. Thejudgment laid emphasis on the fact that the rule of priority in favour ofthe arbitrators is counter-balanced by the courts’ power to review the

Aexistence and validity of the arbitration agreement at the end of thearbitral process. It was elucidated:

“Even if the court takes the view that the arbitral agreement isnot vitiated or that it is not invalid, inoperative or unenforceable,based upon purely prima facie view, nothing prevents theBarbitrator from trying the issue fully and rendering final decisionthereupon … Even after the court takes prima facie view thatthe arbitration agreement is not vitiated on account of factorsenumerated in Section 45, and the arbitrator upon full trial holdsthat there is no vitiating factor in the arbitration agreement andmakes an award, such an award can be challenged under SectionC48(1)(a). The award will be set aside if the party against whom itis invoked satisfies the court inter alia that the agreement wasnot valid under the law to which the parties had subjected it orunder the law of the country where the award was made. Thetwo basic requirements, namely, expedition at the pre- referenceDstage, and fair opportunity to contest the award after full trial,would be fully satisfied by the interpreting Section 45 as enablingthe court to act on prima facie view.[T]he object of the Act would be defeated if the proceedingsremain pending in the court even after commencing of theEarbitration. It is precisely for this reason that I am inclined to theview that at the pre- reference stage contemplated by Section 45,the court is required to take only prima facie view for makingthe reference, leaving the parties to full trial either before theArbitral Tribunal or before the court at the post-award stage.”

FD.M. Dharmadhikari, J. in his partly concurring opinion agreedwith the view expressed by B.N. Srikrishna, J. on most of the aboveaspects with the following reservation:

“112. Whether such decision of the judicial authority or the court,of refusal to make reference on grounds permissible under SectionG45 of the Act would be subjected to further re-examination beforethe Arbitral Tribunal or the court in which eventually the awardcomes up for enforcement in accordance with Section 48(1)(a)of the Act, is legal question of sufficient complexity and in myconsidered opinion since that question does not directly arise onthe facts of the present case, it should be left open for consideration

in an appropriate case where such question is directly raisedand decided by the court.”

While Y.K.Sabharwal, J. (as His Lordship then was) dissented.

64. We would now refer to decisions of this court post enforcementof Act 3 of 2016 with effect from 23rd October,2015. Reference Orderobserves that “one moot question that therefore arises, and which needsto be authoritatively decided by Bench of three learned Judges, iswhether the word ‘existence’ would include weeding-out arbitrationclauses in agreements which indicate that the subject matter is incapableof arbitration”. Thereafter paragraph 59 from Duro Felguera S.A. asto the scope of Section 11(6-A) is quoted.

65. In Mayavati Trading Private Limited v. Pradyuat DebBurman,[50] three Judge Bench has held that the legislature by insertingsub- section (6-A) to Section 11 and making amendments to Section 8by Act 3 of 2016 has legislatively introduced new regime so as to diluteand legislatively overrule the effect and ratio of the judgment of thisCourt in Patel Engineering Ltd. Reliance was placed on paragraph 48and 59 in Duro Felguera S.A. The concluding paragraph in MayavatiTrading Private Limited records:

“10. This being the position, it is clear that the law prior to the2015 Amendment that has been laid down by this Court, whichwould have included going into whether accord and satisfactionhas taken place, has now been legislatively overruled. This beingthe position, it is difficult to agree with the reasoning contained inthe aforesaid judgment, as Section 11(6- A) is confined to theexamination of the existence of an arbitration agreement and isto be understood in the narrow sense as has been laid down in thejudgment in Duro Felguera, SA.”

66. Paragraph 48 and paragraph 59 of Duro Felguera, S.A.referred to above, read as under:

“48...From reading of Section 11(6-A), the intention of thelegislature is crystal clear i.e. the court should and need only lookinto one aspect—the existence of an arbitration agreement. Whatare the factors for deciding as to whether there is an arbitrationagreement is the next question. The resolution to that is simple—

Ait needs to be seen if the agreement contains clause whichprovides for arbitration pertaining to the disputes which have arisenbetween the parties to the agreement.

59. The scope of the power under Section 11(6) of the 1996 ActBwas considerably wide in view of the decisions in SBP and Co.and Boghara Polyfab . This position continued till the amendmentbrought about in 2015. After the amendment, all that the courtsneed to see is whether an arbitration agreement exists— nothingmore, nothing less. The legislative policy and purpose is essentiallyCto minimise the Court’s intervention at the stage of appointing thearbitrator and this intention as incorporated in Section 11(6-A)ought to be respected.”67. Dr. D.Y. Chandrachud, J. in A. Ayyasamy observed thatSection 8 of the Arbitration Act has made departure from Article 8 of

DUNCITRAL Model Law as the former uses the expression ‘judicialauthority’ rather than court and the words “unless it finds that theagreement is null and void, inoperative and incapable of being performed”mentioned in Article 8 do not find place in Section 8. Section 16 empowersthe arbitral tribunal to rule upon its own jurisdiction, including the rulingwith respect to the existence or validity of the arbitration agreement.EFurther clause (b) to Section 16(1) stipulates that decision by an arbitraltribunal that the main contract is void, will not entail ipso jure the invalidityof the arbitration clause. The arbitration agreement survives fordetermining whether the contract in which the arbitration clause isembodied is null and void, which would include voidability. The severabilityFdoctrine in arbitration is of crucial significance. Reference was made tothe judgment of the U.K. Court of Appeal in Fiona Trust and HoldingCorpn. v. Privalov,[51] which judgment was affirmed by the House ofLords in Filli Shipping Co. Limited v. Premium Nafta Products Ltd.,[52]to highlight that the arbitration clause should be liberally construed infavour of one-stop arbitration. Mere allegation that the agent had noGauthority to enter into the main contract is not necessarily an attack onthe arbitration agreement. The principle of severability treats arbitrationagreement as distinct agreement that can be void or voidable only onthe ground that relates to the arbitration agreement. Reference was also

51 (2007) 1 All ER (Comm) 891 : 2007 Bus LR 686 (CA)H52 2007 UKHL 40 : 2007 Bus LR 1719 (HL)

made to the opinion of Scalia, J. of the Supreme Court of America inBuckeye Check Cashing Inc. v. Cardegna[53]that arbitration agreementis severable from the remainder of the contract and unless the challengeis to the arbitration clause itself, the issue of contract’s validity should beconsidered by the arbitrator in the first instance. In conclusion, it wasobserved:

“48. The basic principle which must guide judicial decision-makingis that arbitration is essentially voluntary assumption of anobligation by contracting parties to resolve their disputes througha private tribunal. The intent of the parties is expressed in theterms of their agreement. Where commercial entities and personsof business enter into such dealings, they do so with knowledgeof the efficacy of the arbitral process. The commercialunderstanding is reflected in the terms of the agreement betweenthe parties. The duty of the court is to impart to that commercialunderstanding sense of business efficacy.

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53. The Arbitration and Conciliation Act, 1996, should in my viewbe interpreted so as to bring in line the principles underlying itsinterpretation in manner that is consistent with prevailingapproaches in the common law world. Jurisprudence in India mustevolve towards strengthening the institutional efficacy ofarbitration. Deference to forum chosen by parties as completeremedy for resolving all their claims is but part of that evolution.Minimising the intervention of courts is again recognition of thesame principle.”

68. In Garware Wall Ropes Limited v. Coastal MarineConstructions and Engineering Limited,[54] the question related to theeffect of an arbitration clause contained in the master contract whichwas required to be stamped. The second part of Section 7(2) wasapplicable. The issue was whether the judge hearing the Section 11application should impound the main contract and ensure that duty andpenalty, if any, are paid or in view of sub-section (6-A) to Section 11 thisissue should be examined and decided by the arbitrator. The argumentdrawing distinction between validity and existence was raised before

53 163 L Ed 2d 1038 : 546 US 440 (2006) : 2006 SCC OnLine US SC 14

54 (2019) 9 SCC 209

Athe Court (see paragraph 5 which records the contention) but was rejectedfor several reasons, including the reasoning given in Patel EngineeringLtd., to hold that it is difficult to accede to the argument that Section 16of the Arbitration Act makes it clear that an arbitration agreement hasan independent existence of its own. Secondly, on the connect betweenexistence and validity of an arbitration agreement, it was observed:B

“20. Looked at from slightly different angle, an arbitrationagreement which is contained in an agreement or conveyance isdealt with in Section 7(2) of the 1996 Act. We are concerned withthe first part of Section 7(2) on the facts of the present case, andtherefore, the arbitration clause that is contained in the sub-contractCin question is the subject-matter of the present appeal. It issignificant that an arbitration agreement may be in the form of anarbitration clause “in contract”.

21. Sections 2(a), 2(b), 2(g) and 2(h) of the Contract Act, 1872(the Contract Act) read as under:

“2. Interpretation clause.—In this Act the following wordsand expressions are used in the following senses, unless acontrary intention appears from the context—

(a) When one person signifies to another his willingness to door to abstain from doing anything, with view to obtaining theEassent of that other to such act or abstinence, he is said tomake proposal;

(b) When the person to whom the proposal is made signifieshis assent thereto, the proposal is said to be accepted. proposal,when accepted, becomes promise;

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(g) An agreement not enforceable by law is said to be void;

(h) An agreement enforceable by law is contract;

22. When an arbitration clause is contained “in contract”, it isGsignificant that the agreement only becomes contract if it isenforceable by law. We have seen how, under the Stamp Act, anagreement does not become contract, namely, that it is notenforceable in law, unless it is duly stamped. Therefore, even aplain reading of Section 11(6-A), when read with Section 7(2) ofHthe 1996 Act and Section 2(h) of the Contract Act, would make it

clear that an arbitration clause in an agreement would not existwhen it is not enforceable by law. This is also an indicator thatSMS Tea Estates has, in no manner, been touched by theamendment of Section 11(6-A).”

Thereafter, reference was made to paragraph 83 in Enercon(India) Ltd. v. Enercon GmbH[55]wherein the concept of separabilityof arbitration clause or agreement from the underlying contract wasdealt with, and it was observed that it is necessary to ensure that theintention of the parties does not evaporate into thin air when there is achallenge to the legality, validity, finality, or breach of the underlyingcontract. This is the mandate of Section 16 of the Arbitration Act whichaccepts the concept that the main contract and the arbitration agreementform two different contracts. It is true that support of the national courtswould be required to ensure the success of arbitration but this would notdetract from the legitimacy or independence of the collateral arbitrationagreement even if it is contained in contract, which is claimed to bevoid or voidable or un-concluded. However, this judgment wasdistinguished in Garware Wall Ropes Limited as case relating to thecontroversy whether an arbitration clause was to apply even if there isno concluded contract, but the finding was to the contrary as the casewas within the second part and not under the first part of Section 7(2) ofthe Arbitration Act. In Enercon (India) Ltd., on facts it was held thatthe arbitration clause was separate from the main contract as the disputesrelating to the intellectual property right license agreement were arbitrable.Thereafter, reference was made to the decision in United IndiaInsurance Co. Ltd. v. Hyundai Engg. & Construction Co. Ltd.[56]andit was observed that the arbitration clause was identical as in OrientalInsurance Company Limited v. Narbheram Power and Steel PrivateLimited[57]with the conditional expression of intent only when the liabilitywas unequivocally admitted by the insurer and the dispute was relatedto the quantum to be paid under the policy. On the question of ‘existence’and ‘validity’, the Bench held:

“29. This judgment in Hyundai Engg. case is important in thatwhat was specifically under consideration was an arbitration clausewhich would get activated only if an insurer admits or acceptsliability. Since on facts it was found that the insurer repudiated the

55 (2014) 5 SCC 1 : (2014) 3 SCC (Civ) 59

56 (2018) 17 SCC 607 : (2019) 2 SCC (Civ) 530

57 (2018) 6 SCC 534

DEF

Aclaim, though an arbitration clause did “exist”, so to speak, in thepolicy, it would not exist in law, as was held in that judgment,when one important fact is introduced, namely, that the insurerhas not admitted or accepted liability. Likewise, in the facts of thepresent case, it is clear that the arbitration clause that is containedin the sub-contract would not “exist” as matter of law until theBsub-contract is duly stamped, as has been held by us above. Theargument that Section 11(6-A) deals with “existence”, as opposedto Section 8, Section 16 and Section 45, which deal with “validity”of an arbitration agreement is answered by this Court’sunderstanding of the expression “existence” in Hyundai Engg.Ccase, as followed by us.”69. In Narbheram Power and Steel Private Limited, threeJudges’ Bench of this Court had decided the Civil Appeal arising froman application under Section 11(6) of the Arbitration Act in an insurancecontract. Primarily relying upon the decision of three Judges’ Bench inDVulcan Insurance Co. Ltd. v. Maharaj Singh and Another,[58] it washeld that the disputes were not arbitrable as in terms of the arbitrationclause as the insurer had disputed and not accepted the liability. Thearbitration clause applies only if there is dispute pertaining to thequantum. This decision, though dated 2nd May 2018, did not refer toSection 11(6-A) of the Arbitration Act and interpret the same. The CivilEAppeal had arisen from the correspondence exchanged between theinsurance company and the insured in the years 2013 and 2014. However,reference was made to the concurring opinion of Dr. D.Y. Chandrachud,J. in A. Ayyasamy, and it was observed that the decision was notapplicable to the case at hand. The decision in Chloro Controls IndiaFPrivate Limited was held to be not remotely relevant for deciding thelis in the said case.

70. This decision in Narbheram Power and Steel Private Limitedwas followed in Hyundai Engg. & Construction Co. Ltd., wherein asimilar arbitrationclause had come up for consideration. However, in thisGcase, reference was made to Section 11(6-A) of the Arbitration Act. Itis, therefore, clear that on two occasions, in Narbheram Power andSteel Private Limited and Hyundai Engineering and ConstructionCompany Limited, three Judges’ Bench of this Court affirmativelyand in clear terms held that the question of non-arbitrability relating to

the enquiry whether the dispute was governed by the arbitration clause,can be examined by the courts at the reference stage and may not beleft unanswered to be examined and decided by the arbitral tribunal.These are decisions by Bench of three Judges and, as noticed above,were quoted with affirmation in Garware Wall Ropes Limited by aBench of two Judges.

71. In M/s. PSA Mumbai Investments PTE. Limited v. TheBoard of Trustees of the Jawaharlal Nehru Port Trust and Another,[59]a division bench of this Court, after referring to in detail the globalinvitation of request for qualification and the request for proposal, cameto the conclusion that the arbitration clause in the request for qualificationdocuments would not be applicable and govern the disputes. Therefore,the respondent was left to pursue its claim before an appropriate forum,in accordance with law. The decision was made at the first or the referralstage.72. At this stage we would like to refer to different views expressedby scholars on the subject, which also refer to the legal position in differentcountries. Stavros Brekoulakis in his paper titled On Arbitrability:Persisting Misconceptions and New Areas of Concern accepts thatas per prevailing view in-arbitrability of the subject matter of thearbitration agreement renders the arbitration agreement invalid. However,he argues that in-arbitrability of the subject matter is an issue concerningjurisdiction of arbitral tribunal rather than the validity of the arbitrationagreement. Referring to Article V(1)(a) and Article V(2)(a) of the NewYork Convention, he draws distinction between in-arbitrability andinvalidity. Arbitration agreements are sui generis contracts with bothcontractual and jurisdictional features. The latter is wider in scope. Thecourts at the referral stage may review only whatever is related to theformation of the arbitration agreement as substantive contract, that is,contractual aspects of the arbitration agreement and jurisdictional aspectsof the arbitration agreement should be left to the arbitral tribunal. Inother words, at the stage of referral, the courts may review only whateveris related to the formation of the arbitration agreement (the contractualaspects of the arbitration agreement) and the issues relating to thejurisdictional aspects of the arbitration agreement, which as per the authorincludes the question relating to non-arbitrability of the claims, should beunder the exclusive jurisdiction of the arbitral tribunals. Thus, distinction

Ais drawn between validity in terms of substantive and formal validity ofan arbitration agreement as contractual aspects; and whether claim isnon-arbitrable. The latter question would be arbitrable and not for thecourts to decide at the referral stage. However, on referring to ArticlesII(1) and II(3) of the New York Convention the author did observe thatit seems to include arbitrability of subject matter within the essentialBmeaning of an arbitration agreement.

73. Emmanuel Gaillard and Yas Banifatemi in Negative Effect ofCompetence-Competence: The Rule of Priority in Favour of theArbitrators observe that it is the basic requirement that the parties tothe arbitration agreement should honour their undertaking to submit toCthe arbitration any dispute covered by the agreement. This entails theconsequence that the courts are prohibited from hearing such disputes.On the question of courts’ interference at the reference stage in termsof Article II(3) of the New York Convention, they are of the opinion thatthere is no indication provided as to the standard that should be appliedDfor such determination, that is, whether the courts are required to conductin-depth investigation into the merits of the existence and validity of thearbitration agreement and issue final decision on the question, or thecourt should restrict itself to prima facie verification that the arbitrationagreement exists and is valid, and reserve its full review until the timewhen there is an action to enforce or set aside the arbitral award. TheEquestion, in effect, is one of timing and to the extent the courts areentitled to review the existence and validity of the arbitration agreement.The answer, they observe, is found in the notion of competence-competence, one of the founding principles of the international arbitrationlaw that provides the arbitrators with power to rule on their own jurisdiction

Fand embodies the mirroring effect that the court should refrain fromengaging in examination of the arbitrator’s jurisdiction before thearbitrators themselves have an opportunity to do so. This, they state, byno means suggests that the domestic courts relinquish their power toreview the existence and validity of an arbitration agreement which is

first left to the arbitrators to rule. The courts enjoy the power of scrutinyGafter the award is rendered. They have referred to decisions of thehigher courts of Switzerland,[60] England, France, Canada and India (Shin-

60 Article 5 of the Concordat (domestic law) provides that any dispute concerningrights the parties may freely dispose of is capable of resolution by arbitration, unlessthe subject matter of the dispute falls within the exclusive jurisdiction of state authorityHby virtue of mandatory law.

Etsu Chemical Co. Ltd.) to observe that the court’s review at the firststage is limited to prima facie verification of existence and validity ofthe arbitration clause without the question being analysed in detail whichthe tribunal is empowered to decide when necessary. At the referencestage, the court shall decline jurisdiction if the summary examination ofthe arbitration agreement does not allow it to find that the agreement isnull and void, inoperative and incapable of being performed. The Canadiancourts, apply the general rule that in any case involving an arbitrationclause, challenge to arbitrator’s jurisdiction must be resolved first bythe arbitrator and the court will depart from this rule of systematic referralof arbitration only if the challenge to arbitrator’s jurisdiction is solelybased on question of law. Exercise of court’s jurisdiction in the lattercase would be justified as the court is the forum to which the parties firstapply when requesting for referral and that the arbitrator’s jurisdictionregarding his or her jurisdiction can be reviewed by the court. Further, itallows the court to decide the legal argument for once and for all andavoids duplication of strictly legal debate. Another condition is that thecourt must be satisfied that the challenge to the arbitrator’s jurisdictionis not delaying tactic and that it will not unduly impair the conduct ofarbitration proceedings. This means that the court, when consideringone of the exceptions, may allow the arbitrator to rule on his or hercompetence as would be best for the arbitration process.

74. Referring to the House of Lords decision in Premium NaftaProducts Ltd., the authors have observed that the decision reaffirmsthe principle of severability of an arbitration agreement and the properapproach is to stay the court proceedings in favour of arbitration. LordHoffmann speaking for the House of Lords in Premium Nafta ProductsLtd. has observed:

“to determine on the evidence before the court that [an arbitrationagreement] does exist in which case (if the disputes fall withinthe terms of that agreement) stay must be granted, in the lightof the mandatory ‘shall’ in section 9(4). It is this mandatoryprovision which is the statutory enactment of the relevant articleof the New York Convention, to which the United Kingdom is aparty.”

“the arbitrators are, ‘in general’, recognised the right ‘to be thefirst tribunal to consider whether they have jurisdiction to determine

Athe dispute’ are limited by the requirement that valid arbitrationagreement exist, as well as the further requirements that thearbitration agreement be ‘wide enough to comprise the relevantdispute’ and that the arbitration agreement not be ‘directlyimpeached by whatever ground... to attack the invalidity of thecontract in which the arbitration clause is contained’. In otherBwords, to the extent that the English courts retain degree ofscrutiny as regards the existence, validity and scope of thearbitration agreement, the question of the extent to which Englishcourts will give effect to the negative effect of competence-competence remains uncertain.”C75. John J. Barcelo III, in his paper titled ‘Who Decides theArbitrator’s Jurisdiction? Separability and Competence-Competencein Transnational Perspective’, observes that the greater the numberof issues required to be fully adjudicated at Stage I, the greater is thepotential for disruption of the arbitration process by an obstructing partyDeven in case of genuine agreement to arbitration. An extremely pro-arbitration approach with no or minimal judicial scrutiny might send allthe questions to the arbitrators. At the same time arbitration is no holygrail and not all parties resisting arbitration are obstructionists. partymust have its say in the court, unless he has agreed to arbitrate. goodlegal order must decide what weight be given to these competing valuesEand how to structure the process to maximize overall value by reducingopportunities for obstructionism while preserving legitimate claims forreasonably prompt judicial decision. Referring to the competence-competence and severability principles the author has observed: -

“Competence-competence thus addresses the “who decides”Fquestion on broader scale and is more central to resolving thepolicy tension between protecting arbitration from obstruction, onone hand, and preserving legitimate disputes over arbitratorjurisdiction for prompt court hearing, on the other... Whereasseparability is universally accepted, competence-competence isGcontroversial and has spawned range of different nationalresponses.”

The French approach, as the paper notes, is that if an arbitraltribunal is already seized of the matter, the court will refuse jurisdictionand leave questions as to existence, validity and scope of the arbitrationHagreement to the arbitrators. However, if the arbitral tribunal is not yet

seized of the matter, the court will undertake limited scrutiny of thechallenge and will retain jurisdiction only if the arbitration agreement ismanifestly null. The German Law of Kompetenz-Kompetenz prior tothe new 1998 German Arbitration Act was relatively unique, or arguablyso, as some commentaries maintain that when express power to decidetheir jurisdiction is conferred on the arbitrator, then it would excludejudicial scrutiny at state 1 and stage 3. However, the 1998 GermanArbitration Act based upon UNCITRAL Model Law, states that thecourt may only decide the arbitrator’s jurisdiction if requested to do sobefore the arbitral tribunal is constituted. The German Law expostulatespreference for the arbitrator to decide the jurisdiction in an interim award.Referring to the UNCITRAL Model Law, reference is made to thecompetence-competence as spelled in Article 8(1) which directly dealswith judicial review at Stage I, which is limited to the existence of validarbitration agreement. It postulates that the parties shall be referred toarbitration, unless the court finds that the agreement is null and void,inoperative or incapable of being performed. This, the author feels, couldbe read as authorizing full judicial determination and settlement ofarbitration agreement’s existence and validity. Article 16 (1) embodiesthe positive competence-competence concept and Articles 16(3) and8(2) enact partial negative competence- competence principle. Thelatter allows arbitration proceedings to go forward despite the courtconsideration of the arbitrator’s jurisdiction. Article 16(3) encouragesoutcome by expressly empowering arbitrators to rule over their jurisdictionas preliminary question. The British Arbitration Act of 1996 based onthe Model Law requires the court to stay the legal proceedings, ‘unlesssatisfied’ that the arbitration agreement is null and void, inoperative orincapable of being performed. “Unless satisfied”, the author observes,is closer to “unless it is manifest”, rather than it is to the Model Lawterminology “unless it finds”. The British Act allows the arbitrator torender his/her decision on jurisdiction either in the preliminary award orin the final award, but allows the parties to insist the arbitrators forpreliminary and an early decision as check against wasteful proceedings.The paper also deals with the American approach in domestic andinternational arbitration. In domestic law the issues of arbitrability havebeen divided into procedural and substantial objections. Proceduralarbitrability issues include whether time limit for bringing claim hasbeen observed or whether party has waived its right to arbitrate andalso issues like waiver or estoppel thereby denying party from claiming

Athe right or any pre-condition for invoking arbitration has not been made,etc. These issues are ‘gateway questions’[61] that are presumptively forthe arbitrator to decide and not for the courts to decide, at least at thefirst stage. The substantive aspects are those wherein the court at thefirst stage would go into prima facie examination. Substantive issuespertaining to the validity and existence of the arbitration agreement (LegalBposition in domestic law post- Buckeye Check Cashing Inc. is explainedbelow.) He observes that the United States Supreme Court has frequentlybeen more receptive to international as opposed to domestic agreements.An important consideration being that international agreements arecommercial and involve sophisticated, generally well-advised parties andCthere is need for uniformity of interpretation under the New YorkConvention.76. The United States Supreme Court in Buckeye Check CashingInc., relying on earlier decisions in Prima Paint Corpn. v. Flood &Conklin Mfg. Co.[62]and Southland Corpn. v. Keating,[63] in respect ofDthe domestic American law has clarified the legal position as establishingthe following propositions:

“First, as matter of substantive federal arbitration law, anarbitration provision is severable from the remainder of the contract.Second, unless the challenge is to the arbitration clause itself, theEissue of the contract’s validity is considered by the arbitrator inthe first instance...Applying them to this case, we conclude thatbecause respondents challenge the Agreement, but not specificallyits arbitration provisions, those provisions are enforceable apartfrom the remainder of the contract. The challenge should thereforebe considered by an arbitrator, not court.”FHowever, these observations have to be read with caution asAmerican law states that:

“(a) party aggrieved by the alleged failure... of another toarbitrate... (the) court shall hear the parties, and upon being satisfiedGthat the making of the agreement for arbitration or the failure tocomply therewith is not an issue, the court shall make an orderdirecting the parties to arbitration....if the making of the arbitration

61 First Options of Chicago v. Kaplan, 514 U.S. 938 (1995) and Howsam v. DeanWitter Reynolds, Inc., 537 U.S. 79 (2002).62 18 L Ed 2d 1270: 388 US 395 (1967): 1967 SCC OnLine US SC 160H63 79 L Ed. 2d 1: 465 US 1 (1984): 1984 SCC OnLine US SC 19

agreement or the failure, neglect or refusal to perform the samebe in issue, the court shall proceed summarily to the trial thereof.”

Therefore, in case of issue, if in the trial the court determines thatarbitration agreement was not made it does not order the parties toarbitration. However, this principle does not apply when the arbitrationclause is contained in ‘container contract’ by the application of‘separability’ doctrine. In Buckeye Check Cashing Inc., the USSupreme Court held that separability doctrine applies to both voidableand void ‘container contract’ with an arbitration agreement. Distinctionis drawn and different principles apply to ‘container contract’ with anarbitration clause, and stand-alone arbitration agreement.[64]BuckeyeCheck Cashing Inc. ruled that courts must send to arbitrators any“challenge to the validity of the contract as whole,” (the containercontract), while courts themselves must resolve any challenge directed“specifically to the arbitration clause”. When arbitrators hear anychallenge to the container contract’s validity, Buckeye Check CashingInc. cautioned:

“The issue of the contract’s validity is different from the issue ofwhether any agreement between the alleged obligor and obligewas ever concluded.”

77. Prof. Alan Scott Rau[65] questions the “abstract distinctionbetween ‘invalidity and nonexistence” as “nothing”. The author whilesupporting the principle of separability rejects the argument that formationof contract is different from enforcement of the contract as when theagreement is invalid there is no agreement to anything. He observes:

“But how much of an improvement is it, really, to sweep away theconceptual distinction between “void and voidable” contracts—only to replace it with the equally abstract distinct between“invalidity” and “nonexistence”? These are all, as colleague ofmine likes to say, nothing but word balloons.

Ingenious riffs on this metaphysical distinction between contract“invalidity” and contract “nonexistence” have long been stapleof Continental legal learning. It has been well-established for overa century in learned treatises on the law of obligations. Its tendency

64 Prof. Stephen J. Ware in Arbitration Law’s Separability Doctrine After BuckeyeCheck Cashing, Inc. v. Cardegna

65 Alan Scott Rau in Separability in the United States Supreme Court

Ato take metaphor for reality, its personification of legal concepts,its characterization of doctrine in terms of what is “unthinkable”or “impossible”...of all of this exemplifies the worst excesses offormalism....But like the “void/voidable” distinction that it closelyresembles...to which indeed it may even be identical[50]...this is notonly slippery, but serves no instrumental function whatever. Happily,Bsome modern scholarship seems now at last to appreciate thatthe whole notion of “nonexistence” is not only sterile and purelyverbal...but what is worse, is completely unnecessary. Andparticularly when we come to the doctrine of “separability,” thisis distinction that leads precisely.

CFoot note 50 reads as:

“See Christian Larroumet, 3 Droit Civil: Les Obligations, LeContrat 539-540, 580-81 (5th ed. 2003) (French case law hasoften conflated the notions of contract’s “nonexistence” and its“invalidity”; if an essential condition imposed by the law is missingDthen whether the agreement is termed void [null] or nonexistent“amounts to the same thing, for what is void is treated to all intentsand purpose as if it had never existed”, nonexistence and“voidness” are “one and the same notion”).”

78. Prof. Stephen J. Ware in Arbitration Law’s SeparabilityEDoctrine After Buckeye Check Cashing, Inc., with reference to theAmerican Law projects different view:

“under the contractual approach to arbitration law, the right tolitigate (like other rights) would be alienable through an enforceablecontract but not contract that is unenforceable due toFmisrepresentation, duress, illegality, or any other contract-lawdefense. By contrast, the separability doctrine holds that partyalienates its right to litigate when that party forms contractcontaining an arbitration clause even if that contract isunenforceable...The only way to fix this problem is to repeal theGseparability doctrine and allow courts to hear defenses to theenforcement of the contract containing the arbitration clause.Courts should send cases to arbitration only after rejecting anysuch defenses.”

79. In order to appreciate the effect of the amendments made byAct 3 of 2016, it would be appropriate to refer to the Law Commission’sH

246th Report which had given reasons for amendments to Sections 8and 11 of the Arbitration Act, including insertion of sub-section (6- A) toSection 11. The said reasons read as under:

“24. Two further sets of amendments have been proposed in thiscontext. First, it is observed that lot of time is spent forappointment of arbitrators at the very threshold of arbitrationproceedings as applications under section 11 are kept pending formany years. In this context, the Commission has proposed fewamendments. The Commission has proposed changing the existingscheme of the power of appointment being vested in the “ChiefJustice” to the “High Court” and the “Supreme Court” and hasexpressly clarified that delegation of the power of “appointment”(as opposed to finding regarding the existence/nullity of thearbitration agreement) shall not be regarded as judicial act. Thiswould rationalise the law and provide greater incentive for theHigh Court and/or Supreme Court to delegate the power ofappointment (being non-judicial act) to specialised, externalpersons or institutions. The Commission has further recommendedan amendment to section 11(7) so that decisions of the High Court(regarding existence/nullity of the arbitration agreement) are finalwhere an arbitrator has been appointed, and as such are non-appealable. The Commission further proposes the addition ofsection 11(13) which requires the Court to make an endeavour todispose of the matter within sixty days from the service of noticeon the opposite party.

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31. The Commission is of the view that, in this context, the sametest regarding scope and nature of judicial intervention, asapplicable in the context of section 11, should also apply to sections8 and 45 of the Act – since the scope and nature of judicialintervention should not change upon whether party (intending todefeat the arbitration agreement) refuses to appoint an arbitratorin terms of the arbitration agreement, or moves proceeding beforea judicial authority in the face of such an arbitration agreement.

32. In relation to the nature of intervention, the exposition of thelaw is to be found in the decision of the Supreme Court in ShinEtsu Chemicals Co. Ltd. v. Aksh Optifibre, (2005) 7 SCC 234,(in the context of section 45 of the Act), where the Supreme

ABC

ACourt has ruled in favour of looking at the issues/controversy onlyprima facie.

33. It is in this context, the Commission has recommendedamendments to sections 8 and 11 of the Arbitration and ConciliationAct, 1996. The scope of judicial intervention is only restricted toBsituations where the Court/Judicial Authority finds that thearbitration agreemend does not exist or is null and void. In so faras the nature of intervention is concerned, it is recommended thatin the event the Court/Judicial Authority is prima facie satisfiedagainst the argument challenging the arbitration agreement, it shallappoint the arbitrator and/or refer the parties to arbitration, as theCcase may be. The amendment envisages that the judicial authorityshall not refer the parties to arbitration only if it finds that theredoes not exist an arbitration agreement or that it is null and void.If the judicial authority is of the opinion that prima facie thearbitration agreement exists, then it shall refer the dispute toDarbitration, and leave the existence of the arbitration agreementto be finally determined by the arbitral tribunal. However, if thejudicial authority concludes that the agreement does not exist, thenthe conclusion will be final and not prima facie. The amendmentalso envisages that there shall be conclusive determination as towhether the arbitration agreement is null and void. In the eventEthat the judicial authority refers the dispute to arbitration and/orappoints an arbitrator, under sections 8 and 11 respectively, sucha decision will be final and non-appealable. An appeal can bemaintained under section 37 only in the event of refusal to referparties to arbitration, or refusal to appoint an arbitrator.”FThe Law Commission’s Report specifically refers to the decisionof this Court in Shin-Etsu Chemical Co. Ltd., decision relating totransnational arbitration covered by the New York Convention.

80. The Statement of Objects and Reasons of Act 3 of 2016 readas under:G

“Statement of Objects and Reasons

6. It is proposed to introduce the Arbitration and Conciliation(Amendment) Bill, 2015, to replace the Arbitration and ConciliationH(Amendment) Ordinance, 2015, which inter alia, provides for the

following, namely—

(i) to amend the definition of “Court” to provide that in the case ofinternational commercial arbitrations, the Court should be the HighCourt;

(ii) to ensure that an Indian Court can exercise jurisdiction to grantinterim measures, etc., even where the seat of the arbitration isoutside India;

(iii) an application for appointment of an arbitrator shall be disposedof by the High Court or Supreme Court, as the case may be, asexpeditiously as possible and an endeavour should be made todispose of the matter within period of sixty days;

(iv) to provide that while considering any application forappointment of arbitrator, the High Court or the Supreme Courtshall examine the existence of prima facie arbitration agreementand not other issues;

(v) to provide that the Arbitral Tribunal shall make its award withina period of twelve months from the date it enters upon the referenceand that the parties may, however, extend such period up to sixmonths, beyond which period any extension can only be grantedby the Court, on sufficient cause;

(vi) to provide that model fee schedule on the basis of whichHigh Courts may frame rules for the purpose of determination offees of Arbitral Tribunal, where High Court appoints arbitratorin terms of Section 11 of the Act;

(vii) to provide that the parties to dispute may at any stage agreein writing that their dispute be resolved through fast-trackprocedure and the award in such cases shall be made within aperiod of six months;

(viii) to provide for neutrality of arbitrators, when person isapproached in connection with possible appointment as anarbitrator;

(ix) to provide that application to challenge the award is to bedisposed of by the Court within one year.

7. The amendments proposed in the Bill will ensure that arbitrationprocess becomes more user-friendly, cost effective and leads toexpeditious disposal of cases.”

1116SUPREME COURT REPORTS

A81. We would now examine the principles of separability andcompetence-competence. Clauses (a) and (b) to sub-section (1) toSection 16 enact the principle of separation of the arbitration agreementfrom the underlying or container contract. Clause (a), by legal fiction,gives an independent status to an arbitration clause as if it is standaloneBagreement, even when it is only clause and an integral part of theunderlying or container contract. Clause (b) formulates legal rule thata decision by the arbitral tribunal holding that the main contract is nulland void shall not ipso jure entail invalidity of the arbitration clause.Successful challenge to the existence or invalidity or rescission of themain contract does not necessarily embrace an identical finding as toCthe arbitration agreement, provided the court is satisfied that the arbitrationclause had been agreed upon. The arbitration agreement can be avoidedonly on the ground which relates directly to the arbitration agreement.Notwithstanding the challenge to the underlying or container contract,the arbitration clause in the underlying or container contract survives forDdetermining the disputes. The principle prevents boot-strapping as it isprimarily for the arbitral tribunal and not for the court to decide issues ofexistence, validity and rescission of the underlying contract. Principle ofseparation authorises an arbitral tribunal to rule and decide on theexistence, validity or rescission of the underlying contract without anearlier adjudication of the questions by the referral court.E

82. An interesting and relevant exposition, when assertions claimingrepudiation, rescission or ‘accord and satisfaction’ are made by partyopposing reference, is to found in Damodar Valley Corporation v. K.K.Kar,[66] which had referred to an earlier judgment of this Court in Unionof India v. Kishorilal Gupta & Bros.,[67] to observe:F

“11. After review of the relevant case law, Subba Rao, J., as hethen was, speaking for the majority enunciated the followingprinciples: “(1) An arbitration clause is collateral term of acontract as distinguished from its substantive terms; but none theless it is an integral part of it; (2) however comprehensive theGterms of an arbitration clause may be, the existence of the contractis necessary condition for its operation; it perishes with thecontract; (3) the contract may be non est in the sense that it

never came legally into existence or it was void ab initio; (4)though the contract was validly executed, the parties may put anend to it as if it had never existed and substitute new contractfor it solely governing their rights and liabilities thereunder;

(5) in the former case, if the original contract has no legal existence,the arbitration clause also cannot operate, for along with the originalcontract, it is also void; in the latter case, as the original contract isextinguished by the substituted one, the arbitration clause of the originalcontract perishes with it; and (6) between the two falls many categories“of disputes in connection with contract, such as the question ofrepudiation, frustration, breach etc. In those cases it is the performanceof the contract that has come to an end, but the contract is still in existencefor certain purposes in respect of disputes arising under it or in connectionwith it. As the contract subsists for certain purposes, the arbitration clauseoperates in respect of these purposes.” In those cases, as we havestated earlier, it is the performance of the contract that has come to anend but the contract is still in existence for certain purposes in respect ofdisputes arising under it or in connection with it. We think as the contractsubsists for certain purposes, the arbitration clause operates in respectof these purposes.”

Reference was also made to the minority judgment of Sarkar,

J. in Kishorilal Gupta & Bros. to observe that he had onlydisagreed with the majority on the effect of settlement on the arbitrationclause, as he had held that arbitration clause did survive to settle thedispute as to whether there was or was not an ‘accord and satisfaction’.It was further observed that this principle laid down by Sarkar, J. that‘accord and satisfaction’ does not put an end to the arbitration clause,was not disagreed to by the majority. On the other hand, proposition (6)seems to be laying the weight on to the views of Sarkar, J. These decisionswere under the Arbitration Act,1940. The Arbitration Act specificallyincorporates principles of separation and competence-competence andempowers the arbitral tribunal to rule on its own jurisdiction.

83. Principles of competence-competence have positive andnegative connotations. As positive implication, the arbitral tribunals aredeclared competent and authorised by law to rule as to their jurisdictionand decide non-arbitrability questions. In case of expressed negativeeffect, the statute would govern and should be followed. Implied negativeeffect curtails and constrains interference by the court at the referral

Astage by necessary implication in order to allow the arbitral tribunal torule as to their jurisdiction and decide non-arbitrability questions. As perthe negative effect, courts at the referral stage are not to decide onmerits, except when permitted by the legislation either expressly or bynecessary implication, such questions of non-arbitrability. Suchprioritisation of arbitral tribunal over the courts can be partial and limitedBwhen the legislation provides for some or restricted scrutiny at the ‘firstlook’ referral stage. We would, therefore, examine the principles ofcompetence-competence with reference to the legislation, that is, theArbitration Act.84. Section 16(1) of the Arbitration Act accepts and empowersCthe arbitral tribunal to rule on its own jurisdiction including ruling on theobjections, with respect to all aspects of non-arbitrability including validityof the arbitration agreement. party opposing arbitration, as per sub-section (2), should raise the objection to jurisdiction of the tribunal beforethe arbitral tribunal, not later than the submission of statement of defence.DHowever, participation in the appointment procedure or appointing anarbitrator would not preclude and prejudice any party from raising anobjection to the jurisdiction. Obviously, the intent is to curtail delay andexpedite appointment of the arbitral tribunal. The clause also indirectlyaccepts that appointment of an arbitrator is different from the issue andquestion of jurisdiction and non-arbitrability. As per sub-section (3), anyEobjection that the arbitral tribunal is exceeding the scope of its authorityshould be raised as soon as the matter arises. However, the arbitraltribunal, as per sub-section (4), is empowered to admit plea regardinglack of jurisdiction beyond the periods specified in sub-section (2) and(3) if it considers that the delay is justified. As per the mandate of sub-section (5) when objections to the jurisdiction under sub-sections (2) andF(3) are rejected, the arbitral tribunal can continue with the proceedingsand pass the arbitration award. party aggrieved is at liberty to file anapplication for setting aside such arbitral award under Section 34 of theArbitration Act. Sub-section (3) to Section 8 in specific terms permits anarbitral tribunal to continue with the arbitration proceeding and make anaward, even when an application under sub-section (1) to Section 8 isGpending consideration of the court/forum. Therefore, pendency of thejudicial proceedings even before the court is not by itself bar for thearbitral tribunal to proceed and make an award. Whether the court shouldstay arbitral proceedings or appropriate deference by the arbitral tribunalare distinctly different aspects and not for us to elaborate in the presentreference.H

85. Section 34 of the Act is applicable at the third stage post theaward when an application is filed for setting aside the award. UnderSection 34, an award can be set aside – (i) if the arbitration agreementis not valid as per law to which the party is subject; (ii) if the award dealswith the disputes not contemplated by or not falling within the submissionto arbitration, or contains decision on the matter beyond the scope ofsubmission to arbitration; and (iii) when the subject matter of the disputeis not capable of settlement by arbitration under the law for the timebeing in force. Thus, the competence - competence principle, in itsnegative effect, leaves the door open for the parties to challenge thefindings of the arbitral tribunal on the three issues. The negative effectdoes not provide absolute authority, but only priority to the arbitraltribunal to rule the jurisdiction on the three issues. The courts have a‘second look’ on the three aspects under Section 34 of the ArbitrationAct.[68]

86. The courts at the referral stage do not perform ministerialfunctions. They exercise and perform judicial functions when they decideobjections in terms of Sections 8 and 11 of the Arbitration Act. Section 8prescribes the courts to refer the parties to arbitration, if the action broughtis the subject of an arbitration agreement, unless it finds that primafacie no valid arbitration agreement exists. Examining the term ‘primafacie’, in Nirmala J. Jhala v. State of Gujarat and Another,[69] thisCourt had noted:“48. prima facie case does not mean case proved to the hiltbut case which can be said to be established if the evidencewhich is led in support of the case were [to be] believed. Whiledetermining whether prima facie case had been made out or notthe relevant consideration is whether on the evidence led it waspossible to arrive at the conclusion in question and not whetherthat was the only conclusion which could be arrived at on thatevidence.”

Prima facie case in the context of Section 8 is not to be confusedwith the merits of the case put up by the parties which has to beestablished before the arbitral tribunal. It is restricted to the subject matterof the suit being prima facie arbitrable under valid arbitration

68 The nature and extent of power of judicial review under Section 34 has not beenexamined and answered in this reference.69 (2013) 4 SCC 301

Aagreement. Prima facie case means that the assertions on these aspectsare bona fide. When read with the principles of separation andcompetence-competence and Section 34 of the Arbitration Act, referralcourt without getting bogged-down would compel the parties to abideunless there are good and substantial reasons to the contrary.[70]B87. Prima facie examination is not full review but primary firstreview to weed out manifestly and ex facie non-existent and invalidarbitration agreements and non-arbitrable disputes. The prima faciereview at the reference stage is to cut the deadwood and trim off theside branches in straight forward cases where dismissal is barefacedand pellucid and when on the facts and law the litigation must stop at theCfirst stage. Only when the court is certain that no valid arbitrationagreement exists or the disputes/subject matter are not arbitrable, theapplication under Section 8 would be rejected. At this stage, the courtshould not get lost in thickets and decide debatable questions of facts.Referral proceedings are preliminary and summary and not mini trial.DThis necessarily reflects on the nature of the jurisdiction exercised bythe court and in this context, the observations of B.N. Srikrishna, J. of‘plainly arguable’ case in Shin-Etsu Chemical Co. Ltd. are of importanceand relevance. Similar views are expressed by this Court in VimalKishore Shah wherein the test applied at the pre-arbitration stage waswhether there is “good arguable case” for the existence of an arbitrationEagreement. The test of “good arguable case” has been elaborated bythe England and Wales High Court in Silver Dry Bulk Company Limitedv. Homer Hulbert Maritime Company Limited,[71] in the followingwords:

“Good arguable case” is an expression which has been hallowedFby long usage, but it means different things in different contexts.For the purpose of an application under Section 18, I would holdthat what must be shown is case which is somewhat more than

70 The European Convention on International Commercial Arbitration appears torecognise the prima facie test in Article VI (3):G“Where either party to an arbitration agreement has initiated arbitration proceedingsbefore any resort is had to court, courts of Contracting States subsequently asked todeal with the same subject-matter between the same parties or with the questionwhether the arbitration agreement was non-existent or null and void or had lapsed, shallstay their ruling on the arbitrator’s jurisdiction until the arbitral award is made, unlessthey have good and substantial reasons to the contrary.”H71 (2017) EWHC 44 (Comm.)

merely arguable, but need not be one which appears more likelythan not to succeed. It shall use the term “good arguable case” inthat sense. It represents relatively low threshold which retainsflexibility for the Court to do what is just, while excluding thosecases where the jurisdictional merits were so low that reluctantrespondents ought not to be put to the expense and trouble ofhaving to decide how to deal with arbitral proceedings where itwas very likely that the tribunal had no jurisdiction. In thisconnection it is important to remember that crossing the thresholdof “good arguable case” means that the Court has power to makeone of the orders listed in Section 18(3). It remains forconsideration whether it should do so as matter of discretion.”

Appropriate at this stage would be reference to the judgment ofthe Delhi High Court in NCC Ltd. v. Indian Oil Corporation Ltd.,[72]wherein it has been held as under:

“59.1 In my view, the scope of examination as to whether or notthe claims lodged are Notified Claims has narrowed downconsiderably in view of the language of Section 11(6A) of the1996 Act. To my mind, once the Court is persuaded that it hasjurisdiction to entertain Section 11 petition all that is required toexamine is as to whether or not an arbitration agreement existsbetween the parties which is relatable to the dispute at hand. Thelatter part of the exercise adverted to above, which involvescorrelating the dispute with the arbitration agreement obtainingbetween the parties, is an aspect which is implicitly embedded insub-section (6A) of Section 11 of the 1996 Act, which, otherwise,requires the Court to confine its examination only to the existenceof the arbitration agreement. Therefore, if on bare perusal ofthe agreement it is found that particular dispute is not relatableto the arbitration agreement, then, perhaps, the Court may declinethe relief sought for by party in Section 11 petition. However,if there is contestation with regard to the issue as to whether thedispute falls within the realm of the arbitration agreement, then,the best course would be to allow the arbitrator to form view inthe matter.

59.2 Thus, unless it is in manner of speech, chalk and cheese

DEF

1122SUPREME COURT REPORTS

Asituation or black and white situation without shades of grey, theconcerned court hearing the Section 11 petition should follow themore conservative course of allowing parties to have their saybefore the arbitral tribunal.”

88. The nature and facet of non-arbitrability could also determineBthe level and nature of scrutiny by the court at the referral stage. StravosBrekoulakis has differentiated between contractual aspects of arbitrationagreement which the court can examine at referral stage and jurisdictionalaspects of arbitration agreement which he feels should be left to thearbitral tribunal. John J. Barcelo III, referring to some Americandecisions had divided the issue of non-arbitrability into procedural andCsubstantive objections. The procedurals are ‘gateway questions’ whichwould presumptively be for the arbitrator to decide at least at the firststage. In the Indian context, we would respectfully adopt the threecategories in Boghara Polyfab Private Limited. The first category ofissues, namely, whether the party has approached the appropriate HighCourt, whether there is an arbitration agreement and whether the partyDwho has applied for reference is party to such agreement would besubject to more thorough examination in comparison to the second andthird categories/issues which are presumptively, save in exceptional cases,for the arbitrator to decide. In the first category, we would add andinclude the question or issue relating to whether the cause of actionErelates to action in personam or rem; whether the subject matter of thedispute affects third party rights, have erga omnes effect, requirescentralized adjudication; whether the subject matter relates to inalienablesovereign and public interest functions of the State; and whether thesubject matter of dispute is expressly or by necessary implication non-arbitrable as per mandatory statue(s). Such questions arise rarely and,Fwhen they arise, are on most occasions questions of law. On the otherhand, issues relating to contract formation, existence, validity and non-arbitrability would be connected and intertwined with the issues underlyingthe merits of the respective disputes/claims. They would be factual anddisputed and for the arbitral tribunal to decide. We would not like be tooGprescriptive, albeit observe that the court may for legitimate reasons, toprevent wastage of public and private resources, can exercise judicialdiscretion to conduct an intense yet summary prima facie review whileremaining conscious that it is to assist the arbitration procedure and notusurp jurisdiction of the arbitral tribunal. Undertaking detailed full reviewor long-drawn review at the referral stage would obstruct and causeHdelay undermining the integrity and efficacy of arbitration as dispute

resolution mechanism. Conversely, if the court becomes too reluctant tointervene, it may undermine effectiveness of both the arbitration and thecourt. There are certain cases where the prima facie examination mayrequire deeper consideration. The court’s challenge is to find the rightamount of and the context when it would examine the prima facie caseor exercise restraint. The legal order needs right balance betweenavoiding arbitration obstructing tactics at referral stage and protectingparties from being forced to arbitrate when the matter is clearly non-arbitrable.[73]89. Accordingly, when it appears that prima facie review wouldbe inconclusive, or on consideration inadequate as it requires detailedexamination, the matter should be left for final determination by the arbitraltribunal selected by the parties by consent. The underlying rationale beingnot to delay or defer and to discourage parties from using referralproceeding as rue to delay and obstruct. In such cases full review bythe courts at this stage would encroach on the jurisdiction of the arbitraltribunal and violate the legislative scheme allocating jurisdiction betweenthe courts and the arbitral tribunal. Centralisation of litigation with thearbitral tribunal as the primary and first adjudicator is beneficent as ithelps in quicker and efficient resolution of disputes.

90. The Court would exercise discretion and refer the disputes toarbitration when it is satisfied that the contest requires the arbitral tribunalshould first decide the disputes and rule on non- arbitrability. Similarly,discretion should be exercised when the party opposing arbitration isadopting delaying tactics and impairing the referral proceedings.Appropriate in this regard, are observations of the Supreme Court ofCanada in Dell Computer Corporation v. Union des consommateursand Olivier Dumoulin,[74]which read:

“85. If the challenge requires the production and review of factualevidence, the court should normally refer the case to arbitration,as arbitrators have, for this purpose, the same resources andexpertise as courts. Where questions of mixed law and fact areconcerned, the court hearing the referral application must referthe case to arbitration unless the questions of fact require onlysuperficial consideration of the documentary evidence in the record.

73 Ozlem Susler – ‘The English Approach to Competence-Competence’

74 [2007] 2 S.C.R. 801, 2007 SCC 34

A86. Before departing from the general rule of referral, the courtmust be satisfied that the challenge to the arbitrator’s jurisdictionis not delaying tactic and that it will not unduly impair the conductof the arbitration proceeding. This means that even whenconsidering one of the exceptions, the court might decide that toallow the arbitrator to rule first on his or her competence wouldBbe best for the arbitration process.”

Judgment in Dell’s case has been elucidated and diluted by theSupreme Court of Canada in TELUS Communications Inc. v. AvrahamWellman, viz. interpretation of Section 7(5) of the Arbitration Act, 1991,an aspect with which we are not concerned.C

91. We would now examine Section 11 of the Arbitration Act. Asnoticed above sub-section (6-A) was inserted by the Act 3 of 2016 withretrospective effect from 23rd October, 2015 and omitted by Act 33 of2019. Section 11 (6) requires the court to appoint an arbitrator on anapplication made by party. Section (6-A) to Section 11 stipulates thatDthe court shall, at the stage of appointment under sub-section (4), (5) or(6), confine itself to the examination of the existence of an arbitrationagreement. Sub- section (6-A) was omitted by Act 33 of 2019, but theomission is in view of the introduction of new regime of institutionalisedarbitration as per the report of the committee headed by Justice B.N.ESrikrishna, dated 30.07.2017 which records for the reason ofrecommending the omission as:

“Thus, it can be seen that after the Amendment Act of 2019,Section 11 (6-A) has been omitted because appointment ofarbitrators is to be done institutionally, in which case the SupremeFCourt or the High Court under the old statutory regime are nolonger required to appoint arbitrators and consequently to determinewhether an arbitration agreement exists.”

As observed earlier, Patel Engineering Ltd. explains and holdsthat Sections 8 and 11 are complementary in nature as both relate toGreference to arbitration. Section 8 applies when judicial proceeding ispending and an application is filed for stay of judicial proceeding and forreference to arbitration. Amendments to Section 8 vide Act 3 of 2016have not been omitted. Section 11 covers the situation where the partiesapproach court for appointment of an arbitrator. Mayavati TradingPrivate Ltd., in our humble opinion, rightly holds that Patel EngineeringHLtd. has been legislatively overruled and hence would not apply even

post omission of sub-section (6-A) to Section 11 of the Arbitration Act.Mayavati Trading Private Ltd. has elaborated upon the object andpurposes and history of the amendment to Section 11, with reference tosub-section (6-A) to elucidate that the Section, as originally enacted,was facsimile with Article 11 of the UNCITRAL Model of law ofarbitration on which the Arbitration Act was drafted and enacted.Referring to the legislative scheme of Section 11, different interpretations,and the Law Commission’s Reports, it has been held that the omittedsub-section (6-A) to Section 11 of the Arbitration Act would continue toapply and guide the courts on its scope of jurisdiction at stage one, that isthe pre-arbitration stage. Omission of sub-section (6-A) by Act 33 of2019 was with the specific object and purpose and is relatable to bysubstitution of sub-sections (12), (13) and (14) to Section 11 of theArbitration Act by Act 33 of 2019, which, vide sub-section (3A) stipulatesthat the High Court and this court shall have the power to designate thearbitral institutions which have been so graded by the Council underSection 43-I, provided where graded arbitral institution is not available,the concerned High Court shall maintain panel of arbitrators fordischarging the function and thereupon the High Court shall perform theduty of an arbitral institution for reference to the arbitral tribunal.Therefore, it would be wrong to accept that post omission of sub-section(6-A) to Section 11 the ratio in Patel Engineering Ltd. would becomeapplicable.

92. We now proceed to examine the question, whether the word‘existence’ in Section 11 merely refers to contract formation (whetherthere is an arbitration agreement) and excludes the question ofenforcement (validity) and therefore the latter falls outside the jurisdictionof the court at the referral stage. On jurisprudentially and textualism it ispossible to differentiate between existence of an arbitration agreementand validity of an arbitration agreement. Such interpretation can drawsupport from the plain meaning of the word “existence’. However, it isequally possible, jurisprudentially and on contextualism, to hold that anagreement has no existence if it is not enforceable and not binding.Existence of an arbitration agreement presupposes valid agreementwhich would be enforced by the court by relegating the parties toarbitration. Legalistic and plain meaning interpretation would be contraryto the contextual background including the definition clause and wouldresult in unpalatable consequences. reasonable and just interpretationof ‘existence’ requires understanding the context, the purpose and the

Arelevant legal norms applicable for binding and enforceable arbitrationagreement. An agreement evidenced in writing has no meaning unlessthe parties can be compelled to adhere and abide by the terms. partycannot sue and claim rights based on an unenforceable document. Thus,there are good reasons to hold that an arbitration agreement exists onlywhen it is valid and legal. void and unenforceable understanding is noBagreement to do anything. Existence of an arbitration agreement meansan arbitration agreement that meets and satisfies the statutoryrequirements of both the Arbitration Act and the Contract Act and whenit is enforceable in law. We would proceed to elaborate and give furtherreasons:C

(i) In Garware Wall Ropes Ltd., this Court had examined thequestion of stamp duty in an underlying contract with an arbitration clauseand in the context had drawn distinction between the first and secondpart of Section 7(2) of the Arbitration Act, albeit the observations madeand quoted above with reference to ‘existence’ and ‘validity’ of theDarbitration agreement being apposite and extremely important, we wouldrepeat the same by reproducing paragraph 29 thereof:

“29. This judgment in Hyundai Engg. case is important in thatwhat was specifically under consideration was an arbitration clausewhich would get activated only if an insurer admits or acceptsEliability. Since on facts it was found that the insurer repudiated theclaim, though an arbitration clause did “exist”, so to speak, in thepolicy, it would not exist in law, as was held in that judgment,when one important fact is introduced, namely, that the insurerhas not admitted or accepted liability. Likewise, in the facts of thepresent case, it is clear that the arbitration clause that is containedFin the sub- contract would not “exist” as matter of law until thesub-contract is duly stamped, as has been held by us above. Theargument that Section 11(6-A) deals with “existence”, as opposedto Section 8, Section 16 and Section 45, which deal with “validity”of an arbitration agreement is answered by this Court’sGunderstanding of the expression “existence” in Hyundai Engg.case, as followed by us.”;

Existence and validity are intertwined, and arbitration agreementdoes not exist if it is illegal or does not satisfy mandatory legalrequirements. Invalid agreement is no agreement.

(ii) The court at the reference stage exercises judicial powers.‘Examination’, as an ordinary expression in common parlance, refers toan act of looking or considering something carefully in order to discoversomething (as per Cambridge Dictionary). It requires the person to inspectclosely, to test the condition of, or to inquire into carefully (as per Merriam-Webster Dictionary). It would be rather odd for the court to hold andsay that the arbitration agreement exists, though ex facie and manifestlythe arbitration agreement is invalid in law and the dispute in question isnon-arbitrable. The court is not powerless and would not act beyondjurisdiction, if it rejects an application for reference, when the arbitrationclause is admittedly or without doubt is with minor, lunatic or the onlyclaim seeks probate of Will.

(iii) Most scholars and jurists accept and agree that the existenceand validity of an arbitration agreement are the same. Even StarvosBrekoulakis accepts that validity, in terms of substantive and formalvalidity, are questions of contract and hence for the court to examine.

(iv) Most jurisdictions accept and require prima facie review bythe court on non-arbitrability aspects at the referral stage.

(v) Sections 8 and 11 of the Arbitration Act are complementaryprovisions as was held in Patel Engineering Ltd.. The object andpurpose behind the two provisions is identical to compel and force partiesto abide by their contractual understanding. This being so, the twoprovisions should be read as laying down similar standard and not aslaying down different and separate parameters. Section 11 does notprescribe any standard of judicial review by the court for determiningwhether an arbitration agreement is in existence. Section 8 states thatthe judicial review at the stage of reference is prima facie and not final.Prima facie standard equally applies when the power of judicial reviewis exercised by the court under Section 11 of the Arbitration Act.Therefore, we can read the mandate of valid arbitration agreement inSection 8 into mandate of Section 11, that is, ‘existence of an arbitrationagreement’.

(vi) Exercise of power of prima facie judicial review of existenceas including validity is justified as court is the first forum that examinesand decides the request for the referral. Absolute “hands off” approachwould be counterproductive and harm arbitration, as an alternative disputeresolution mechanism. Limited, yet effective intervention is acceptableas it does not obstruct but effectuates arbitration.

A(vii) Exercise of the limited prima facie review does not in anyway interfere with the principle of competence– competence andseparation as to obstruct arbitration proceedings but ensures that vexatiousand frivolous matters get over at the initial stage.

(viii) Exercise of prima facie power of judicial review as to theBvalidity of the arbitration agreement would save costs and checkharassment of objecting parties when there is clearly no justification anda good reason not to accept plea of non-arbitrability. In Subrata RoySahara v. Union of India,[75] this Court has observed:

“191. The Indian judicial system is grossly afflicted with frivolousClitigation. Ways and means need to be evolved to deter litigantsfrom their compulsive obsession towards senseless and ill-considered claims. One needs to keep in mind that in the processof litigation, there is an innocent sufferer on the other side ofevery irresponsible and senseless claim. He suffers long-drawnanxious periods of nervousness and restlessness, whilst theDlitigation is pending without any fault on his part. He pays for thelitigation from out of his savings (or out of his borrowings) worryingthat the other side may trick him into defeat for no fault of his. Hespends invaluable time briefing counsel and preparing them forhis claim. Time which he should have spent at work, or with hisEfamily, is lost, for no fault of his. Should litigant not becompensated for what he has lost for no fault? The suggestion tothe legislature is that litigant who has succeeded must becompensated by the one who has lost. The suggestion to thelegislature is to formulate mechanism that anyone who initiatesand continues litigation senselessly pays for the same. It isFsuggested that the legislature should consider the introduction ofa “Code of Compulsory Costs”.

(ix) Even in Duro Felguera, Kurian Joseph, J., in paragraph 52,had referred to Section 7(5) and thereafter in paragraph 53 referred to ajudgment of this Court in M.R. Engineers and Contractors PrivateGLimited v. Som Datt Builders Limited[76]to observe that the analysis inthe said case supports the final conclusion that the Memorandum ofUnderstanding in the said case did not incorporate an arbitration clause.

75 (2014) 8 SCC 470H76 (2009) 7 SCC 696

Thereafter, reference was specifically made to Patel Engineering Ltd.and Boghara Polyfab Private Limited to observe that the legislativepolicy is essential to minimise court’s interference at the pre-arbitralstage and this was the intention of sub-section (6) to Section 11 of theArbitration Act. Paragraph 48 in Duro Felguera specifically states thatthe resolution has to exist in the arbitration agreement, and it is for thecourt to see if the agreement contains clause which provides forarbitration of disputes which have arisen between the parties. Paragraph59 is more restrictive and requires the court to see whether an arbitrationagreement exists – nothing more, nothing less. Read with the otherfindings, it would be appropriate to read the two paragraphs as layingdown the legal ratio that the court is required to see if the underlyingcontract contains an arbitration clause for arbitration of the disputeswhich have arisen between the parties - nothing more, nothing less.Reference to decisions in Patel Engineering Ltd. and Boghara PolyfabPrivate Limited was to highlight that at the reference stage, post theamendments vide Act 3 of 2016, the court would not go into and finallydecide different aspects that were highlighted in the two decisions.

(x) In addition to Garware Wall Ropes Limited case, this Courtin Narbheram Power and Steel Private Limited and Hyundai Engg.& Construction Co. Ltd., both decisions of three Judges, has rejectedthe application for reference in the insurance contracts holding that theclaim was beyond and not covered by the arbitration agreement. Thecourt felt that the legal position was beyond doubt as the scope of thearbitration clause was fully covered by the dictum in Vulcan InsuranceCo. Ltd. Similarly, in M/s. PSA Mumbai Investments PTE. Limited,this Court at the referral stage came to the conclusion that the arbitrationclause would not be applicable and govern the disputes. Accordingly, thereference to the arbitral tribunal was set aside leaving the respondent topursue its claim before an appropriate forum.

(xi) The interpretation appropriately balances the allocation of thedecision-making authority between the court at the referral stage andthe arbitrators’ primary jurisdiction to decide disputes on merits. Thecourt as the judicial forum of the first instance can exercise prima facietest jurisdiction to screen and knockdown ex facie meritless, frivolousand dishonest litigation. Limited jurisdiction of the courts ensuresexpeditious, alacritous and efficient disposal when required at the referralstage.

A93. Section 43(1) of the Arbitration Act states that the LimitationAct, 1963 shall apply to arbitrations as it applies to court proceedings.Sub-section (2) states that for the purposes of the Arbitration Act andLimitation Act, arbitration shall be deemed to have commenced on thedate referred to in Section 21. Limitation law is procedural and normallydisputes, being factual, would be for the arbitrator to decide guided byBthe facts found and the law applicable. The court at the referral stagecan interfere only when it is manifest that the claims are ex facie timebarred and dead, or there is no subsisting dispute. All other cases shouldbe referred to the arbitral tribunal for decision on merits. Similar wouldbe the position in case of disputed ‘no claim certificate’ or defence onCthe plea of novation and ‘accord and satisfaction’. As observed inPremium Nafta Products Ltd., it is not to be expected that commercialmen while entering transactions inter se would knowingly create systemwhich would require that the court should first decide whether the contractshould be rectified or avoided or rescinded, as the case may be, and thenif the contract is held to be valid, it would require the arbitrator to resolveDthe issues that have arisen.

94. We would also resolve the question of principles applicable tointerpretation of an arbitration clause. This is important and directlyrelates to scope of the arbitration agreement. In Premium NaftaProducts Ltd., on the question of interpretation and construction of anEarbitration clause, it is observed:

“In approaching the question of construction, it is thereforenecessary to inquire into the purpose of the arbitration clause. Asto this, I think there can be no doubt. The parties have enteredinto relationship, an agreement or what is alleged to be anFagreement or what appears on its face to be an agreement, whichmay give rise to disputes. They want those disputes decided by atribunal which they have chosen, commonly on the grounds ofsuch matters as its neutrality, expertise and privacy, the availabilityof legal services at the seat of the arbitration and the unobtrusiveGefficiency of its supervisory law. Particularly in the case ofinternational contracts, they want quick and efficient adjudicationand do not want to take the risks of delay and, in too many cases,partiality, in proceedings before national jurisdiction.”

In Narbheram Power and Steel Private Ltd., this Court whileHdealing with the arbitration clause in the insurance agreement, has held

that the arbitration clause should be strictly construed, relying on theprinciples of strict interpretation that apply to insurance contracts. Theseobservations have been repeated in other cases.

What is true and applicable for men of commerce and businessmay not be equally true and apply in case of laymen and to those whoare not fully aware of the effect of an arbitration clause or had littleoption but to sign on the standard form contract. Broad or narrowinterpretations of an arbitration agreement can, to great extent, effectcoverage of retroactive arbitration agreement. Pro-arbitration broadinterpretation, normally applied to international instruments, andcommercial transactions is based upon the approach that the arbitrationclause should be considered as per the true contractual language andwhat it says, but in case of doubt as to whether related or close disputesin the course of parties’ business relationship is covered by the clause,the assumption is that such disputes are encompassed by the agreement.The restrictive interpretation approach on the other hand states that incase of doubt the disputes shall not be treated as covered by the clause.Narrow approach is based on the reason that the arbitration should beviewed as an exception to the court or judicial system. The third approachis to avoid either broad or restrictive interpretation and instead the intentionof the parties as to scope of the clause is understood by considering thestrict language and circumstance of the case in hand. Terms like ‘all’,

‘any’, ‘in respect of’, ‘arising out of’ etc. can expand the scope andambit of the arbitration clause. Connected and incidental matters, unlessthe arbitration clause suggests to the contrary, would normally be covered.

Which approach as to interpretation of an arbitration agreementshould be adopted in particular case would depend upon various factorsincluding the language, the parties, nature of relationship, the factualbackground in which the arbitration agreement was entered, etc. In caseof pure commercial disputes, more appropriate principle of interpretationwould be the one of liberal construction as there is presumption infavour of one-stop adjudication.

95. Accordingly, we hold that the expression ‘existence of anarbitration agreement’ in Section 11 of the Arbitration Act, would includeaspect of validity of an arbitration agreement, albeit the court at thereferral stage would apply the prima facie test on the basis of principlesset out in this judgment. In cases of debatable and disputable facts, andgood reasonable arguable case, etc., the court would force the parties to

Aabide by the arbitration agreement as the arbitral tribunal has primaryjurisdiction and authority to decide the disputes including the question ofjurisdiction and non-arbitrability.

96. Discussion under the heading ‘Who decides Arbitrability?’can be crystallized as under:

(a) Ratio of the decision in Patel Engineering Ltd. on the scopeof judicial review by the court while deciding an application underSections 8 or 11 of the Arbitration Act, post the amendments byAct 3 of 2016 (with retrospective effect from 23.10.2015) andeven post the amendments vide Act 33 of 2019 (with effect from09.08.2019), is no longer applicable.

(b) Scope of judicial review and jurisdiction of the court underSection 8 and 11 of the Arbitration Act is identical but extremelylimited and restricted.

(c) The general rule and principle, in view of the legislative mandateDclear from Act 3 of 2016 and Act 33 of 2019, and the principle ofseverability and competence-competence, is that the arbitraltribunal is the preferred first authority to determine and decide allquestions of non-arbitrability. The court has been conferred powerof “second look” on aspects of non- arbitrability post the award inEterms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.

(d) Rarely as demurrer the court may interfere at the Section 8or 11 stage when it is manifestly and ex facie certain that thearbitration agreement is non- existent, invalid or the disputes areFnon-arbitrable, though the nature and facet of non-arbitrabilitywould, to some extent, determine the level and nature of judicialscrutiny. The restricted and limited review is to check and protectparties from being forced to arbitrate when the matter isdemonstrably ‘non-arbitrable’ and to cut off the deadwood. Thecourt by default would refer the matter when contentions relatingGto non-arbitrability are plainly arguable; when consideration insummary proceedings would be insufficient and inconclusive; whenfacts are contested; when the party opposing arbitration adoptsdelaying tactics or impairs conduct of arbitration proceedings. Thisis not the stage for the court to enter into mini trial or elaboratereview so as to usurp the jurisdiction of the arbitral tribunal but to

VIDYA DROLIA AND OTHERS v.

DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

affirm and uphold integrity and efficacy of arbitration as analternative dispute resolution mechanism.

97. Reference is, accordingly, answered.

98. In view of the aforesaid findings and ratio, we dispose of theCivil Appeal and the Special Leave Petitions in the following manner:

Civil Appeal No. 2402 of 2019

In view of the fact that the Arbitral Tribunal is hearing the matter,we leave the issue of arbitrability to the Tribunal to decide and come toa conclusion on the same. Further, the parties are at liberty to execute orchallenge the award in accordance with law. The direction that the awardcannot be executed without applying for permission of this Court is herebyvacated.

Special Leave Petition (Civil) Nos. 5605-5606 of 2019

In this case, arbitral award has been passed on 24th August 2019.It is apprised before this Bench that the Arbitral Tribunal has rejectedDthe objection to the Tribunal’s jurisdiction. In this view, the petitioner isat liberty to pursue the remedy available under Section 34 of theArbitration Act.

Special Leave Petition (Civil) No. 11877 of 2020

In view of the fact that the Arbitral Tribunal is hearing the matter,we leave the issue of arbitrability to the Tribunal to decide and come toa conclusion on the same. Further, the parties are at liberty to challengethe award if they are not satisfied with the same in this regard.

N. V. RAMANA, J.

1. I have had the advantage of reading in advance the opinion ofmy learned Brother Justice Sanjiv Khanna. The present matters dealwith very important aspect in the arbitration jurisprudence in this country,which necessitate separate opinion.

2. Recently, Mr. Fali S. Nariman, in one of his lectures had alludedthat the development of arbitration in India is not attributable to the successin arbitration, rather to the failures of the Court. This reflects anuncomfortable relationship which arbitration has had with litigation allthese days. The judicial hesitancy of the courts to be more accommodativetowards the tribunal and the need for respecting arbitral awards

Arequires this Court to extensively reflect and bring the Court’sjurisprudence in tune with the liberal intention sought to be furtheredpost the 2015 amendment to the Arbitration and Conciliation Act, 1996(hereinafter referred to as “the Act”).

3. Before we delve into the merits of the matters, we need toBhave brief reference to the facts which are necessary for the disposalof these cases. As all the cases are similar, we take facts from CivilAppeal No. 2402 of 2019, to indicate the history of this litigation and thequestions which arise from the same. In the year 2006, appellants (tenants)entered into tenancy agreement with the predecessor title holder withrespect to certain buildings. Clause 23 of the agreement contained aCdispute resolution clause. In the year 2012, the tenancy was attorned tothe respondent, after which the appellants started paying monthly rent tothe respondent (landlord). On 24.08.2015, the respondent (landlord) wrotea letter seeking vacant possession of the property as the period of leasewas expiring on 01.02.2016. Appellants (tenants) did not vacate.DAggrieved, the respondent (landlord) invoked the arbitration under thedispute resolution mechanism provided under the contract. On 28.04.2016,the respondent filed the present Section 11 petition before the CalcuttaHigh Court for appointment of an arbitrator. On 07.09.2016, the HighCourt passed the impugned order appointing an arbitrator, after rejectingthe appellants objections on the arbitrability of the dispute.E

4. Aggrieved by the same, the appellants (tenants) haveapproached this Court in the present proceedings, on the reason that,after the judgment of the High Court was rendered appointing thearbitrator, this Court in Himangni Enterprises v. Kamaljeet SinghAhluwalia, (2017) 10 SCC 706 [hereinafter referred as ‘HimangniFEnterprises’] held that where the Transfer of Property Act, 1882 appliedbetween the landlord and tenant disputes between the said parties wouldnot be arbitrable.

5. When Civil Appeal No. 2402 of 2019 was listed for hearing on28.02.2019, then the said matter was referred to three- Judge Bench,Gwith following observations:

“7. It will be noticed that “validity” of an arbitration agreement is,therefore, apart from its “existence”. One moot question thattherefore, arises, and which needs to be authoritatively decidedby Bench of three learned Judges, is whether the wordH“existence” would include weeding-out arbitration clauses in

agreements which indicate that the subject-matter is incapable ofarbitration…

x x x x x x x x x x

30. In this view of the matter, this case is referred to Bench ofthree Hon’ble Judges.

31. Given the facts of this case and the fact that 18 hearings havebeen held, the stay that has been granted to the arbitral proceedingsby our order dated 13.08.2018 is lifted, and the proceedings maygo on and culminate in an award. The award cannot be executedwithout applying to this Court. The appeal is disposed ofaccordingly.”

6. The reference order primarily indicates that there are twosubstantive issues to be settled by this Court herein, namely:

I.To what extent does the Court decide the question ofnon-arbitrability under Section 11 of the Act?

II.Whether tenancy disputes are capable of being resolvedthrough arbitration?

7. Before we analyze the issue, we need to observe argumentscanvassed by the counsel appearing for the parties, who set the tone forthese cases.

8. Learned senior counsel, Mr. K. V. Vishwanathan, appearingfor the petitioners in SLP (C.) No. 5605-5606 of 2019, submitted asunder:

•That Section 11(6A) of the Act is unique provision, whichis neither traceable to UNCITRAL Model Law nor any otherdomestic legislation.

•In spite of the absence of legislative provision in othercountries, Courts have adjudicated on the existence of thearbitration agreement at the stage of the appointment of thearbitrator itself.

•The standard of ‘good arguable case’ as expounded in NobleDenton Middle East v. Noble Denton International Ltd.,[2010] EWHC 2574 (Comm.), should be applied by theCourts to examine the existence of valid arbitrationagreement.

1136SUPREME COURT REPORTS

A•Therefore, the scope of judicial enquiry at the stage ofreference/appointment is not limited to the mere presenceof the arbitration clause.

9. Learned Senior advocate, Mr. Nakul Dewan on behalf of the

Respondent in SLP (C.) No. 5605-5606 of 2019, argued that:B

•Section 11(6A) was conscious departure from theearlier existing judicial interpretation, which had widened thescope of judicial enquiry.

•The 246th Law Commission Report stated that Section 11(6A)limits the scope of judicial enquiry to determination of aCprima facie existence.

•Word ‘existence’ under Section 11(6A) means legallyenforceable existence and not mere presence in the contract.

•While examining the issue of existence in an application underDSection 11, this Court is merely functioning as an appointingauthority.

10. Learned senior counsel, Mr. Manoj Swarup on behalf of thePetitioner in SLP (C.) No. 11877 of 2020, has submitted that:

•Lease hold rights under the Transfer of Property Act, 1882E[hereinafter referred to as “TP Act”]are rights in rem.

•A contractual tenant upon determination of lease becomes astatutory tenant and is entitled to the statutory protection..Therefore, the arbitration in that case would be ousted.

•Section 11 is not the stage for determination of the issue ofFarbitrability in those cases where the test of Section 89, CPCis to be applied.

11. Learned senior counsel, Mr. Gopal Shankarnarayan on behalfof the Petitioners in SLP (C.) No. 5605-5606 of 2019, submitted that:

G•Section 11(6A) mandates an ‘examination of the evidenceof an arbitration agreement’.

•The 2015 Amendment does not convert the judicial powerconferred in Section 11(6) into an administrative power.

•The decision in Mayavati Trading Pvt. Ltd. v. PradyuatHDeb Burman, (2019) 8 SCC 714 is inapplicable.

12. Learned counsel, Mr. Sourav Agarwal on behalf of theRespondent in Civil Appeal No. 2402 of 2019, contended that:

•the Court under Section 8 and 11 of the Act, does not act asa mere post-office.

•this is case in which the appellants have participated in theBarbitral proceedings.

•Relying upon various judgments, including certain High Courtjudgments that were passed after the judgment in HimangniEnterprises (supra) to state that, on facts, HimangniEnterprises (supra) was wholly distinguishable as it didnot apply to situation of lease expiring by efflux of time.C

•certain High Court judgments had, after the judgment inHimangni Enterprises (supra), distinguished the saidjudgment on this and other grounds. As an alternativesubmission, he said that, in any case, Himangni Enterprises(supra) would require reconsideration as it did not state theDlaw correctly.

13. We answer the two questions in seriatim.

14. Arbitration is creature of consensus. It is completelydependent on party autonomy and the intention expressed in theagreement. contract, having multiple clauses including arbitrationagreements, can be divided into two parts. The clauses relating to thecommercial relationship, i.e., the obligations and duties of each party,can be referred to as the ‘main contract’. The arbitration agreement soto say is separate contract in itself.

15. The separability of the arbitration agreement from the maincontract, historically existed in Roman law. Since early times, arbitrationwas viewed with suspicion, which allowed for the development ofseparability. Ironically, the ‘pro- arbitration’ function of separability inthe present day is late 19th and 20th century development, traceable toGermanic and Swiss jurisprudence.

16. In India, arbitration was governed earlier by the ArbitrationAct of 1899, and later 1940. Presently, arbitration is governed bythe Act of 1996, with subsequent amendments. cursory reading of thelegislative history points to the fact that the intention of the legislature isto make the regime ‘pro-arbitration’. Whenever this Court has afforded

Aa contrary view, there has been trend to undo the changes to bring it inline with the international standards prevailing in certain arbitrationhavens such as Singapore, London and Hong Kong.

17. Before we move to the analysis of the case, we need to brieflydescribe the structure of the Arbitration Act, 1996 with subsequentBamendments. The set-up of both international and domestic arbitrationis contained under PARTS I, IA and II of the Act. The preamble to theAct provides that it was enacted with view to have uniformity of thelaw of arbitral procedures to establish fair and efficient mechanism toresolve disputes.

C18. Section 2 provides for the definition of ‘arbitration agreement’which is to be interpreted in terms of Section 7 of the Act, which statesas under:

7. Arbitration agreement. -

(1) In this Part, “arbitration agreement” means an agreement byDthe parties to submit to arbitration all or certain disputes whichhave arisen or which may arise between them in respect of adefined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitrationclause in contract or in the form of separate agreement.

E(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in—

(a)a document signed by the parties;

(b)an exchange of letters, telex, telegrams or other means ofFtelecommunication including communication throughelectronic means which provide record of the agreement;or

(c)an exchange of statements of claim and defence in whichthe existence of the agreement is alleged by one party andGnot denied by the other.

(5) The reference in contract to document containing anarbitration clause constitutes an arbitration agreement if thecontract is in writing and the reference is such as to make thatarbitration clause part of the contract.

19. Section 5 emphasizes very important principle, that judicialinterference in arbitral proceedings should be minimum and should belimited to instances where it is specifically provided for under the Act.Although the provision envisages wide amplitude, various judgmentsof this Court have restricted the utility of same. [ICICI Bank Ltd. v.Sidco Leathers Ltd., (2006) 10 SCC 452]

20. Section 8 of the Act in its present and earlier form, are

extracted below:

AUnder the old Arbitration Act, 1940, the Court had the discretionin referring the parties to arbitration, however such discretion is doneaway with after the coming into force of the 1996 Act. The Arbitrationand Conciliation Act, 1996 does not, in specific terms, exclude anycategory of disputes—civil or commercial—from arbitrability. Intrinsiclegislative material is in fact to the contrary. Section 8 contains mandateBthat where an action is brought before judicial authority in matterwhich is the subject of an arbitration agreement, the parties shall bereferred by it to arbitration, if party to or person claiming through aparty to the arbitration agreement applies not later than the date ofsubmitting the first statement on the substance of the dispute. The onlyCexception is where the authority finds, prima facie, that there is no validarbitration agreement. Section 8 contains positive mandate and obligatesthe judicial authority to refer parties to arbitration in terms of thearbitration agreement. While dispensing with the element of judicialdiscretion, the statute imposes an affirmative obligation on every judicialauthority to hold down parties to the terms of the agreement entered intoDbetween them to refer disputes to arbitration. Article 8 of the UNCITRALModel Law enabled court to decline to refer parties to arbitration if itis found that the arbitration agreement is null and void, inoperative orincapable of being performed. Section 8 of the Act has made departurefrom the UNCITRAL law which is indicative of the wide reach andEambit of the statutory mandate. Section 8 uses the expansive expression“judicial authority” rather than “court” and the words “unless it findsthat the agreement is null and void, inoperative and incapable of beingperformed” do not find place in Section 8.

21. On the 2015 amendment to Section 8, Justice InduFMalhotra, comments as under:

Section 8 was amended by the 2015 Amendment to clarify thescope of enquiry by the judicial authority at the pre-referencestage. The court would be required to make prima faciedetermination as to whether there is valid arbitration agreement.[77]GWe must state that we are partly in agreement with the aforesaid,wherein the judicial authorities have been given clear mandate forinterference at the pre-reference stage, however, the threshold standardis worded differently, as pointed herein.

77 Justice Indu Malhotra, Commentary on the Law of Arbitration, Vol. I, 4th Ed., p.H317.

VIDYA DROLIA AND OTHERS v.

DURGA TRADING CORPORATION [N. V. RAMANA, J.]

22. Section 11 of the Act in its present and earlier forms, areextracted below:

Section 11 prior to Act 11 Section 11 after Act 3 of 2016 Section 11 after Act 33 of of 20162016

ABCDEFGH

[2020] 11 S.C.R.

(8) The Chief Justice or sub-section(4) or the person or institution sub-section(5) or designated by him, in sub-section(6), shall, appointing an arbitrator, notwithstanding any shall have due regard to judgment, decree or order – of any Court, confine to (a) any qualification the examination of the required of the arbitrator existence of an arbitration by the agreement of the agreement. parties; and (6B) The designation of (b) other considerations any person or institution as are likely to secure the by the Supreme Court or, appointment of an as the case may be, the independent and High Court, for the impartial arbitrator. purposes of this section shall not be regarded as (9) In the case of delegation of judicial appointment of sole or power by the Supremethird arbitrator in an Court or the High Court. international commercial arbitration, the Chief (7) decision on matter Justice of India or the entrusted by person or institution sub-section(4) or designated by him may sub-section(5) or appoint an arbitrator of sub-section(6) to the nationality other than the Supreme Court or, as the nationalities of the case may be, the High parties where the parties Court or the person or belong to different institution designated by nationalities. such Court is final and no appeal including Letters (10) The Chief Justice Patent Appeal shall lie may make such scheme against such decision as he may deem appropriate for dealing (8) The Supreme Court with matters entrusted by or, as the case may be, the sub- section(4) or sub- High Court or the person section(5) or sub- or institution designated section(6) to him. by such Court, before appointing an arbitrator, (11) Where more than shall seek disclosure in one request has been writing from the made under sub- prospective arbitrator in section(4) or sub- terms of sub-section(1) of section(5) or section 12, and have due sub-section(6) to the regard to—Chief Justices of (a) any qualifications different High Courts or required for the arbitrator their designates, the by the agreement of the Chief Justice or his parties; and designate to whom the

days from receipt of Arequest by one party from the other party to so agree the appointment shall be made on an application of the party in accordance with the provisions contained in Bsub- section(4). (6) Where, under an appointment procedure agreed upon by the -parties, (a) party fails to act as required under that Cprocedure; or (b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that Dprocedure; or (c) person, including an institution, fails to perform any function entrusted to him or it under that procedure, the Eappointment shall be made, on an application of the party, by the arbitral institution designated by the Supreme Court, in case of international Fcommercial arbitration, or by the High Court, in case of arbitrations other than international commercial arbitration, as the case may be to take the necessary measure, unless the Gagreement on the appointment procedure provides other means for securing the appointment.

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1146SUPREME COURT REPORTS

[2020] 11 S.C.R.

23. Section 12 imposes, upon person approached to be anarbitrator, the obligation to disclose to the parties in writing anycircumstance that may give rise to justifiable doubts as to his independenceand impartiality. An arbitrator can be challenged if there are circumstancesthat give rise to justifiable doubts about his independence and impartialityEor if he does not possess the qualifications agreed to by the parties, butsuch challenge can be made only for reasons which the party challengingbecomes aware of after the appointment has been made. Section 13speaks of the challenge procedure. It states that the parties are free toagree on such procedure. Failing that, the party who makes the challengeFmust within fifteen days after becoming aware of the constitution of theArbitral Tribunal or of any of the circumstances mentioned in Section12, send written statement of the reasons for the challenge to theArbitral Tribunal. Unless the challenged arbitrator withdraws or the otherparty to the arbitration agrees to the challenge, the Arbitral Tribunal shalldecide upon the challenge and if the challenge is not successful itGshall continue the arbitration proceedings and make an award. That awardcan be sought to be set aside under Section 34.

24. Section 16 empowers the Arbitral Tribunal to rule on its ownjurisdiction. Sub-section (1) of Section 16 is relevant, and reads thus:

“16. (1) The Arbitral Tribunal may rule on its own jurisdiction,including ruling on any objections with respect to the existence orvalidity of the arbitration agreement, and for that purpose, -

(a) an arbitration clause which forms part of contract shall betreated as an agreement independent of the other terms of theBcontract; and

(b) decision by the Arbitral Tribunal that the contract is null andvoid shall not entail ipso jure the invalidity of the arbitration clause.”

25. Section 34 of the Act is as under:

under

proof

VIDYA DROLIA AND OTHERS v.

DURGA TRADING CORPORATION [N. V. RAMANA, J.]

EFGH

[2020] 11 S.C.R.

Athat that ProvidedthatanBaward shall not be setaside merely on the Provided that an award ground of an erroneousshall not be set aside application of the law ormerely on the ground ofby reappreciation ofan erroneous application evidence. of the law orby Creappreciation of An application for settingevidence. aside may not be madeafter three months (3) An application for setting aside may not be the party made after three months making that applicationhave elapsed from thearbitralDdate on which awardor, the party making that application had received the arbitral award or, if request had been made byunder section 33, fromthe arbitral tribunal: the date on which that request had been EProvided that if the Courtdisposed of by the is arbitral tribunal:preventedProvided that if the by sufficient cause from Court is satisfied that the making the applicationapplicantwas within the said period ofpreventedbythree months it maysufficient cause from Fmaking the application entertain the applicationwithin further period ofwithin the said period of thirty days, but not three months it may thereafter.entertain the application within further period of (4) On receipt of anthirty days, but not application underthereafter. sub-section (1), theG(4) On receipt of an appropriate application under sub-section (1), the Court may, where it is time appropriate and it is so requested by party,

The intention of the legislators to provide for Section 34 in itspresent form, is to have limited review of the award instead of afull-fledged appeal process. party intending to object to an award, isfirst required to file an application under Section 34 (1) indicating the

CDEFG

Aobjections along with the copy of an award and other necessarydocuments, which are required as proof to satisfy grounds provided underSection 34(2)(a) and (b) of the Act. Such complete petition is required tobe filed within the time period prescribed under Section 34 (3) of theAct, failing which the appeal is rendered nugatory. The limitationprescribed under Section 34(3) is bound with the right to file objectionsBitself. The objections filed under Section 34 must be relatable to thelimited grounds provided under Section 34 (2) of the Act. It is thelegislative intention to provide for numerous limitations under Section 34of the Act, which are required to be strictly adhered to so as to makeIndian arbitration time-bound and commercially prudent to opt for theCsame. Section 37 of the Act, provides for limited appeal against theSection 34 order, as well as against certain other specified orders.

26. It is important to observe Section 45 of the Act, which providesa judicial authority with the power to refer parties to arbitration whenPart II of the Act applies, in the following manner:

27. The present structure of arbitration is such that Courts are toassist and support arbitration and leave the substantive part of adjudicationto the arbitral tribunal. Some scholars have suggested that the judicialmechanism that comports with the rule of law may be fundamentally atodds with non- judicial/arbitral mechanism which is therefore less formal.But our understanding is that that the rule of law is less in tension witharbitration than critics imagine, because they both aim to serve the samegoal-the pursuit of justice.

28. On plain reading of the Act, whenever dispute arisesbetween parties, they are free to approach an appropriate judicial forumto get their dispute resolved. If the parties have contemplated anarbitration agreement, then they can approach tribunal for getting thematter resolved. Once they choose the non-judicial method, partyaggrieved by the award, has chance to approach judicial institutionsunder Section 34 and 37 (appeal jurisdiction), if the award is violative ofthe grounds provided thereunder.

29. With this understanding, we need to have regards to certainprecedents of this Court, in order to understand the dispute. Thecase, which started the debate was the case of Konkan Railway Corpn.Ltd. v. Mehul Construction Co., (2000) 7 SCC 201, wherein Benchof three Judges of this Court, emphasized the utility of ‘Chief Justice’ asoccurring under the earlier Section 11, to come to conclusion that thepower of appointment of an arbitrator was an administrative action. Theproposition laid down in the aforesaid case, was confirmed by aConstitution Bench of this Court in Konkan Railway Corporation Ltd.v. Rani Construction (P.) Ltd., (2002) 2 SCC 388. It may berelevant to quote the following observation by this Court:

“21. It might also be that in given case the Chief Justice or hisdesignate may have nominated an arbitrator although the periodof thirty days had not expired. If so, the Arbitral Tribunal wouldhave been improperly constituted and be without jurisdiction. Itwould then be open to the aggrieved party to require the ArbitralTribunal to rule on its jurisdiction. Section 16 provides for this. Itstates that the Arbitral Tribunal may rule on its own jurisdiction.That the Arbitral Tribunal may rule “on any objections withrespect to the existence or validity of the arbitrationagreement” shows that the Arbitral Tribunal’s authorityunder Section 16 is not confined to the width of its

1154SUPREME COURT REPORTS

Ajurisdiction, as was submitted by learned counsel for theappellants, but goes to the very root of its jurisdiction.Therewould, therefore, be no impediment in contending before theArbitral Tribunal that it had been wrongly constituted by reasonof the fact that the Chief Justice or his designate had nominatedan arbitrator although the period of thirty days had not expiredBand that, therefore, it had no jurisdiction.”

(emphasis supplied)

30. Again, the aforesaid decision came to be referred to seven-Judge Bench in SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCCC618, wherein majority was penned by Justice P.K. Balasubramanyanand the minority dissent was by Justice C. K. Thakker.

31. The majority opinion, concluded that the power of referenceunder Section 11 is judicial function for the following reasons:

First, the sub-section (7) of Section 11 makes the adjudicationDby the Chief Justice, final. Such final determination in usualcourse would be judicial determination.

Second, the reason for delegating the power to the highestjudicial authority in the State or the Country, is to provide credibilityfor the process.

EThird, the power of persona designata cannot be delegated,unless such power is judicial power.

Fourth, Section 8 and 11 are complimentary and the ambit ofpower is the same.

FFifth, the principle of Kompetenz-Kompetenz, as enshrined underSection 16, will come to play only if the parties approach theArbitral Tribunal, without taking recourse to Section 8 or 11.

Sixth, it is incongruous to permit the order of the Chief Justiceunder Section 11(6) of the Act being subjected to scrutiny underGArticle 226 of the Constitution.

Seventh, the Court on earlier instances did not concentrate onthe threshold satisfaction of the Chief Justice, before the same isreferred to an arbitration.

Eighth, it would be wasteful exercise for parties to arbitrate on

the jurisdiction, only to find that tribunal did not have sufficientjurisdiction to entertain the arbitration.

32. The minority view posits that the function of the ChiefJustice was administrative rather than judicial, for the following reasons:

First, merely because decision adversely affects party, cannotbe the sole reason to conclude that the function is judicial.

Second, finality of decision taken by the Chief Justice underSection 11(7) refers to only matters such as qualification,independence and impartiality of the arbitrator. The aforesaid doesnot necessarily make the determination judicial or quasi-judicial.

Third, Section 16 spells out rule of chronological priority.

Fourth, Section 16 has negative effect, that is, it allows thearbitrators to decide their jurisdiction prior to the Courts steppingin post rendering of the award.

Fifth, there is duty cast upon the Chief Justice under Section11(6) ‘to act fairly’.

In our consideration, the aforesaid case was heavily caught in theobfuscated concept of judicial or administrative duty, and there is scarceobservation on the appropriate standards of judicial enquiry or whataspects does the Court need to consider, while referring matter toarbitration.

33. In Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd.,(2005) 7 SCC 234, this Court decided the ambit of Section 45 of the Act,which relates to the provision for referring parties to arbitration underthe New York Convention. While deciding the scope of Section 45 ofthe Act, Justice Y. K. Sabharwal, as he then was, held in his opinion thata judicial forum seized of the mater should fully rule on the validity andexistence of the agreement, before referring the same to the arbitration.The prima facie standard, which the Court found to be gaining popularityacross the globe, could not be applied as the statutory language of Section45, as it existed, did not support such standard. It may be necessary toobserve certain passage from Justice Sabharwal’s opinion:“55. I may also deal with the contention urged on behalf of theappellant that only prima facie finding is required to be given ona combined reading of Sections 45, 48 and 50 from which it can

Abe culled out that party who has suffered an award can alwayschallenge the same under Section 48 on the ground that thearbitration agreement is null and void. This read in conjunctionwith the right of appeal given under Section 50 and the power ofthe arbitrator to rule on his own jurisdiction clearly shows theintent of the legislature to avoid delay which would be inevitable ifBit has to be final decision and it would defeat the object of soonplacing all material before the Arbitral Tribunal. I am afraid thatthis cannot be accepted as the real purpose of Section 48 is toensure that at some stage whether pre-award, post-award or both,a judicial authority must decide the validity, operation, capabilityCof performance of the arbitration agreement. In various cases theparties may not resort to Section 45 in the first place, and toovercome such eventuality, the legislature has enacted Section48(1)(a). In other words, if the court is not asked to satisfy itselfas to the validity of the agreement at pre-award stage (Section45), then by virtue of Section 48, it is given another opportunity toDdo so. Apart from this, under Section 48, the court may refuse toenforce the foreign award on the ground other than the invalidityof the arbitration agreement. As far as the question of Section 50is concerned, it is well settled in law that an appeal is creatureof statute (M. Ramnarain (P) Ltd. v. State Trading Corpn. ofEIndia Ltd. [(1983) 3 SCC 75] ) and right to appeal inheres in noone. (Gujarat Agro Industries Co. Ltd. v. Municipal Corpn. of theCity of Ahmedabad [(1999) 4 SCC 468]). The legislature underSection 50 has clearly allowed appeal only in case the judicialauthority refuses to refer the parties to arbitration or refuses toenforce the foreign award. The fact that provision is not madeFfor an appeal in case reference is made to arbitration is not aground to say that the court should prima facie decide the validityof the agreement ignoring the express provisions of Section 45.The legislature has granted the right of appeal in the event ofrefusal to refer but not in the event of order being made forGreference of the parties to arbitration. This provision for appeal isnot determinative of the scope of Section 45 to mean that thedetermination thereunder has to be only prima facie.”

Justice B. N. Srikrishna, on the other hand, held that the languageof Section 8 and 45 are different, wherein the judicial authority isHempowered under Section 45 to refuse reference to arbitration, if it finds

that the agreement is ‘null and void, inoperative or incapable of beingperformed’. He further held that ex visceribus interpretation of theSection 45 clearly points to prima facie view. Justice Dharmadhikari,for different reasons, agreed with the reasoning of Justice B. N.Srikrishna, in the following manner:

“111. With utmost respect to both of them, I am inclined to agreewith the view expressed by learned Brother Srikrishna, J. butonly with rider and partly different reason which may I statebelow:

The main issue is regarding the scope of power of any judicialauthority including regular civil court under Section 45 of theAct in making or refusing reference of dispute arising from aninternational arbitration agreement governed by the provisionscontained in Part III Chapter I of the Act of 1996. I respectfullyagree with learned Brother Srikrishna, J. only to the extent that ifon prima facie examination of the documents and material onrecord including the arbitration agreement on which request forreference is made by one of the parties, the judicial authority orthe court decides to make reference, it may merely mention thesubmissions and contentions of the parties and summarily decidethe objection if any raised on the alleged nullity, voidness,inoperativeness or incapability of the arbitration agreement. Incase, however, on prima facie view of the matter, which isrequired to be objectively taken on the basis of material andevidence produced by the parties on the record of the case, thejudicial authority including regular civil court, is inclined to rejectthe request for reference on the ground that the agreement is“null and void” or “inoperative” or “incapable of being performed”within the meaning of Section 45 of the Act, the judicial authorityor the court must afford full opportunities to the parties to leadwhatever documentary or oral evidence they want to lead andthen decide the question like trial of preliminary issue onjurisdiction or limitation in regular civil suit and pass an elaboratereasoned order. Where judicial authority or the court refuses tomake reference on the grounds available under Section 45 ofthe Act, it is necessary for the judicial authority or the court whichis seized of the matter to pass reasoned order as the same issubject to appeal to the appellate court under Section 50(1)(a) of

[2020] 11 S.C.R.

Athe Act and further appeal to this Court under sub-section (2) ofthe said section.”

34. In Shree Ram Mills Ltd. v. Utility Premises (P) Ltd.,(2007)4 SCC 599, while observing the scope of the Court under Section 11 (6),the Court held as under:

“27……..A glance on this para would suggest the scope of theorder under Section 11 to be passed by the Chief Justice or hisdesignate. Insofar as the issues regarding territorial jurisdictionand the existence of the arbitration agreement are concerned, theChief Justice or his designate has to decide those issues becauseotherwise the arbitration can never proceed. Thus, the Chief Justicehas to decide about the territorial jurisdiction and also whetherthere exists an arbitration agreement between the parties andwhether such party has approached the court for appointment ofthe arbitrator. The Chief Justice has to examine as to whether theclaim is dead one or in the sense whether the parties have alreadyconcluded the transaction and have recorded satisfaction of theirmutual rights and obligations or whether the parties concernedhave recorded their satisfaction regarding the financial claims. Inexamining this if the parties have recorded their satisfactionregarding the financial claims, there will be no question of anyissue remaining. It is in this sense that the Chief Justice has toexamine as to whether there remains anything to be decidedbetween the parties in respect of the agreement and whether theparties are still at issue on any such matter. If the Chief Justicedoes not, in the strict sense, decide the issue, in that event it is forhim to locate such issue and record his satisfaction that such issueexists between the parties. It is only in that sense that the findingon live issue is given. Even at the cost of repetition we muststate that it is only for the purpose of finding out whether thearbitral procedure has to be started that the Chief Justice has torecord satisfaction that there remains live issue in between theparties. The same thing is about the limitation which is always amixed question of law and fact. The Chief Justice only has torecord his satisfaction that prima facie the issue has not becomedead by the lapse of time or that any party to the agreement hasnot slept over its rights beyond the time permitted by law to agitatethose issues covered by the agreement. It is for this reason that it

was pointed out in the above para that it would be appropriatesometimes to leave the question regarding the live claim to bedecided by the Arbitral Tribunal. All that he has to do is to recordhis satisfaction that the parties have not closed their rights and thematter has not been barred by limitation. Thus, where the ChiefJustice comes to finding that there exists live issue, then naturallythis finding would include finding that the respective claims ofthe parties have not become barred by limitation.”

35. The next jurisprudential jump was provided by NationalInsurance Company Limited v. Boghara Polyfab Private Limited,(2009) 1 SCC 267, wherein this Court observed as under:

“19. In SBP & Co. v. Patel Engg. Ltd. [(2005) 8 SCC 618] , aseven-Judge Bench of this Court considered the scope of Section11 of the Act and held that the scheme of Section 11 of the Actrequired the Chief Justice or his designate to decide whether thereis an arbitration agreement in terms of Section 7 of the Act beforeexercising his power under Section 11(6) of the Act and itsimplications. … This Court held: (SCC pp. 660-61 & 663, paras39 & 47)

“39.… He has to decide whether there is an arbitrationagreement, as defined in the Act and whether the person whohas made the request before him, is party to such anagreement. It is necessary to indicate that he can also decidethe question whether the claim was dead one; or along-barred claim that was sought to be resurrected andwhether the parties have concluded the transaction byrecording satisfaction of their mutual rights and obligationsor by receiving the final payment without objection. … Forthe purpose of taking decision on these aspects, the ChiefJustice can either proceed on the basis of affidavits and thedocuments produced or take such evidence or get suchevidence recorded, as may be necessary. …

(emphasis supplied)

22. Where the intervention of the court is sought for appointmentof an Arbitral Tribunal under Section 11, the duty of the ChiefJustice or his designate is defined in SBP & Co. [(2005) 8 SCC

A618] This Court identified and segregated the preliminary issuesthat may arise for consideration in an application under Section 11of the Act into three categories, that is, (i) issues which the ChiefJustice or his designate is bound to decide; (ii) issues which hecan also decide, that is, issues which he may choose to decide;and (iii) issues which should be left to the Arbitral Tribunal toBdecide.

22.1 The issues (first category) which the Chief Justice/hisdesignate will have to decide are:

(a) Whether the party making the application has approached theCappropriate High Court.

(b) Whether there is an arbitration agreement and whether theparty who has applied under Section 11 of the Act, is party tosuch an agreement.

22.2 The issues (second category) which the Chief Justice/hisDdesignate may choose to decide (or leave them to the decision ofthe Arbitral Tribunal) are:

(a) Whether the claim is dead (long-barred) claim or live claim.

(b) Whether the parties have concluded the contract/transactionby recording satisfaction of their mutual rights and obligation orEby receiving the final payment without objection.

22.3 The issues (third category) which the Chief Justice/hisdesignate should leave exclusively to the Arbitral Tribunal are:

(i) Whether claim made falls within the arbitration clause (asFfor example, matter which is reserved for final decision of adepartmental authority and excepted or excluded from arbitration).

(ii) Merits or any claim involved in the arbitration.

23. It is clear from the scheme of the Act as explained by thisCourt in SBP & Co. [(2005) 8 SCC 618] , that in regard to issuesGfalling under the second category, if raised in any application underSection 11 of the Act, the Chief Justice/his designate may decidethem, if necessary, by taking evidence. Alternatively, he may leavethose issues open with direction to the Arbitral Tribunal to decidethe same. If the Chief Justice or his designate chooses toHexamine the issue and decides it, the Arbitral Tribunal

cannot re-examine the same issue. The Chief Justice/hisdesignate will, in choosing whether he will decide such issueor leave it to the Arbitral Tribunal, be guided by the object of theAct (that is expediting the arbitration process with minimum judicialintervention). Where allegations of forgery/fabrication are madein regard to the document recording discharge of contract by fulland final settlement, it would be appropriate if the Chief Justice/his designate decides the issue.”

(emphasis supplied)

36. In Chloro Controls India Private Ltd. v. Severn Trent WaterPurification Inc., (2013) 1 SCC 641, this Court had to expound thescope of Section 45 in multi-party arbitration. The Court held as under:

“84. The issue of whether the courts are empowered to reviewthe existence and validity of the arbitration agreement prior toreference is more controversial. majority of the countries admitto the positive effect of kompetenzkompetenz principle, whichrequires that the Arbitral Tribunal must exercise jurisdiction overthe dispute under the arbitration agreement. Thus, challenge tothe existence or validity of the arbitration agreement will not preventthe Arbitral Tribunal from proceeding with hearing and ruling uponits jurisdiction. If it retains jurisdiction, making of an award on thesubstance of the dispute would be permissible without waiting forthe outcome of any court action aimed at deciding the issue of thejurisdiction. The negative effect of the kompetenzkompetenzprinciple is that arbitrators are entitled to be the first to determinetheir jurisdiction which is later reviewable by the court, when thereis action to enforce or set aside the arbitral award. Where thedispute is not before an Arbitral Tribunal, the court must alsodecline jurisdiction unless the arbitration agreement ispatently void, inoperative or incapable of being performed.”

(emphasis supplied)

37. In Arasmeta Captive Power Company Private Limitedv. Lafarge India Pvt. Ltd., (2013) 15 SCC 414, this Court had to answerthe issue concerning the conflict between Chloro Controls Case(supra) and SBP Case (supra), which the Court formulated in thefollowing manner:

“2. We have commenced our opinion with the aforesaid expositionof law as arguments have been canvassed by Mr Ranjit Kumar,learned Senior Counsel for the appellants, with innovativeintellectual animation how three-Judge Bench in ChloroControls India (P) Ltd. v. Severn Trent Water PurificationInc., (2013) 1 SCC 641 has inappositely and incorrectly understoodthe principles stated in the major part of the decision rendered bya larger Bench in SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC618 and, in resistance, Mr Harish Salve and Dr A.M. Singhvi,learned Senior Counsel for the respondent, while defending theview expressed later by the three-Judge Bench, have laid immenseemphasis on consistency and certainty of law that garner publicconfidence, especially in the field of arbitration, regard being hadto the globalisation of economy and stability of the jurisprudentialconcepts and pragmatic process of arbitration that sparkles thesoul of commercial progress. We make it clear that we are notwriting the grammar of arbitration but indubitably we intend, andwe shall, in course of our delineation, endeavour to clear the maze,so that certainty remains “A Definite” and finality is “Final”.”

The Court answering the question, answered thus:

“40. From the aforesaid authorities itis luculent that the largerEBench in SBP [SBP & Co. v. PatelEngg. Ltd., (2005) 8 SCC618], after deliberating at length with regard to the role of theChief Justice or his designate, while dealing with an applicationunder Section 11(6) of the Act, has thought it appropriate to definewhat it precisely meant in para 39 of the judgment. The majority,if we allow ourselves to say so, was absolutely conscious that itFrequired to be so statedand hence, it did so. The deliberation wasrequired to be made as the decision in Konkan Railway Corpn.Ltd. v. Rani Construction (P) Ltd. [(2002) 2 SCC 388] wherethe Constitution Bench had held that an order passed by theChief Justice under Section 11(6) is an administrative orderGand not judicial one and, in that context, the Bench in many aparagraph proceeded to state about the role of the Chief Justiceor his designate. The phrases which have been emphasised byMr Ranjit Kumar, it can be irrefragably stated, they cannot bebrought to the eminence of ratio decidendi of the judgment. Thestress laid thereon may be innovative but when the learned Judges

themselves have culled out the ratio decidendi in para 39, it isextremely difficult to state that the principle stated in SBP [SBP& Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] requires the ChiefJustice or his designate to decide the controversy when raisedpertaining to arbitrability of the disputes. Or to express an opinionon excepted matters. Such an inference by syllogistic process islikely to usher in catastrophe in jurisprudence developed in thisfield. We are disposed to think so as it is not apposite to pick up aline from here and there from the judgment or to choose oneobservation from here or there for raising it to the status of “theratio decidendi”. That is most likely to pave one on the path ofdanger and it is to be scrupulously avoided. The propositions setout in SBP [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618]

, in our opinion, have been correctly understood by the two-JudgeBench in Boghara Polyfab (P) Ltd. [National Insurance Co.Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267] and thesame have been appositely approved by the three- Judge Benchin Chloro Controls India (P) Ltd. [Chloro Controls India (P)Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641]and we respectfully concur with the same. We find no substancein the submission that the said decisions require reconsideration,for certain observations made in SBP [SBP & Co. v. Patel Engg.Ltd., (2005) 8 SCC 618], were not noticed. We may hasten to addthat the three-Judge Bench has been satisfied that the ratiodecidendi of the judgment in SBP [SBP & Co. v. Patel Engg.Ltd., (2005) 8 SCC 618] is really inhered in para 39 of thejudgment.”

38. This Court in Duro Felguera, S.A. v. Gangavaram Port,(2017) 9 SCC 729, held as under:

(Justice Banumathi)

“20…Since the dispute between the parties arose in 2016, theamended provision of sub-section (6-A) of Section 11 shall govern theissue, as per which the power of the Court is confined only to examinethe existence of the arbitration agreement.”

Justice Kurian Joseph)

“59. The scope of the power under Section 11(6) of the 1996 Actwas considerably wide in view of the decisions in SBP and Co.

ABC

A[SBP and Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] andBoghara Polyfab [National Insurance Co. Ltd. v. BogharaPolyfab (P) Ltd., (2009) 1 SCC 267]. This position continuedtill the amendment brought about in 2015. After theamendment, all that the courts need to see is whether an—arbitration agreement existsnothing more, nothing less.BThe legislative policy and purpose is essentially to minimizethe Court’s intervention at the stage of appointing the-arbitrator and this intention as incorporated in Section 11(6A) ought to be respected.”(emphasis supplied)

39. However, in Oriental Insurance Company Ltd. v.Narbheram Power and Steel Private Limited, (“Oriental Insurance”)(2018) 6 SCC 534, three-Judge Bench of this Court, following thedecision in Vulcan Insurance v. Maharaj Singh, (1976) 1 SCC 943,dismissed an application under Section 11 of the Act after examining theDarbitrability of the dispute. It may be noted that the Court did not answerthe question as to the power of the Court under Section 11 of the Act inthis case.

40. Similarly, in United India Insurance Company Limited v.Hyundai Engineering and Construction Company Limited,E(“Hyundai Engineering”) (2018) 17 SCC 607, the Court examinedthe arbitrability of the dispute as well as whether the dispute fell withinthe ambit of an excepted matter by placing heavy reliance on thedecision in Oriental Insurance (supra). These two cases are, bynecessary, implication to be restricted to the facts and circumstances ofthe case.F

41. Further, in United India Insurance Company Limited v.Antique Art Exports Private Limited (“Antique Arts”), (2019) 5 SCC362, this Court, in proceeding under Section 11 of the Act, distinguishedthe holding in Duro Felguera (supra) on the grounds that the sameGwas mere general observation about the effect of the amendedprovisions and that the said decision was distinguishable on the facts ofthe case. The Court held that the power under Section 11 with the ChiefJustice/ his designates is judicial power and not an administrativefunction, therefore leaving some degree of judicial intervention. The Courtwent on to hold that when it comes to examining the prima facieH

existence of an arbitration agreement, it is always necessary to ensurethat the dispute resolution process does not become unnecessarilyprotracted. On this basis, the Court, in proceeding under Section 11 ofthe Act, analyzed the effect of the execution of discharge voucher andthe settlement of the claim by accord and satisfaction. On finding theclaim to have been settled by accord and satisfaction, the Court heldthat there was no dispute under the agreement to be referred to anarbitrator for adjudication.

42. In Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman,(2019) 8 SCC 714, Bench of three Judges, while overruling the AntiqueArts Case (supra), held as under:

“10. This being the position, it is clear that the law prior to the2015 Amendment that has been laid down by this Court, whichwould have included going into whether accord and satisfactionhas taken place, has now been legislatively overruled. This beingthe position, it is difficult to agree with the reasoning contained inthe aforesaid judgment [United India Insurance Co. Ltd. v.Antique Art Exports (P) Ltd., (2019) 5 SCC 362] , as Section11(6-A) is confined to the examination of the existence of anarbitration agreement and is to be understood in the narrow senseas has been laid down in the judgment in Duro Felguera, SA[Duro Felguera, SA v. Gangavaram Port Ltd., (2017) 9 SCC729] — see paras 48 & 59 [Ed.: The said paras 48 & 59 of DuroFelguera, SA v. Gangavaram Port Ltd., (2017) 9 SCC 729,for ready reference, read as follows:”48. Section 11(6-A)added by the 2015 Amendment, reads as follows:”11. (6- A) TheSupreme Court or, as the case may be, the High Court, whileconsidering 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 ofthe existence of an arbitration agreement.”(emphasis supplied)From reading of Section 11(6-A), the intention of the legislatureis crystal clear i.e. the court should and need only look into oneaspect— the existence of an arbitration agreement. What are thefactors for deciding as to whether there is an arbitration agreementis the next question. The resolution to that is simple—it needs tobe seen if the agreement contains clause which provides forarbitration pertaining to the disputes which have arisen between

Athe parties to the agreement.***59. The scope of the power underSection 11(6) of the 1996 Act was considerably wide in view ofthe decisions in SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC618 and National Insurance Co. Ltd. v. Boghara Polyfab (P)Ltd., (2009) 1 SCC 267. This position continued till the amendmentbrought about in 2015. After the amendment, all that the courtsBneed to see is whether an arbitration agreement exists— nothingmore, nothing less. The legislative policy and purpose is essentiallyto minimise the Court’s intervention at the stage of appointing thearbitrator and this intention as incorporated in Section 11(6-A)ought to be respected.”].C

11. We, therefore, overrule the judgment in Antique Art Exports(P) Ltd. [United India Insurance Co. Ltd. v. Antique ArtExports (P) Ltd., (2019) 5 SCC 362] as not having laid downthe correct law but dismiss this appeal for the reason given inpara 3 above.”

D43. From the study of the precedents, the following propositions,concerning Section 11 of the Act, are clear and binding:

1.Reference power under Section 11 of the Act is judicial andnot administrative.

E2.There was wide discretion for judicial interference at thestage of reference under Section 11 of the Act, prior to theArbitration Amendment Act of 2015.

3.Amendment in 2015 was brought into force to limit the powerof judicial interference under Section 11 of the Act.F44. Having observed the precedents holding the field in respect ofSection 11, we now come to an analysis of Section 8. Section 8 of theAct applies, when matter is brought by one of the parties before theCourt, and the other party brings to the notice of the Court of existenceof such arbitration agreement. Under these circumstances, the Court isobligated to refer matter to arbitration, on satisfaction that validGarbitration agreement exists between the parties. The 2015 amendmentclarified that the test to be utilized by the Court is on prima faciebasis.

45. The primary reason for the same, is the negative effect ofKompetenz Kompetenz under Section 16, which mandates that theH

arbitral tribunal is required to first look into any objections as to thejurisdiction of the tribunal itself. It is due to the fact that parties mayabuse and protract the proceedings if there is no gatekeeping mechanism,that the legislature has found balance, wherein the Court is required toexamine the validity of an arbitration agreement on prima facie basis.

46. In this context, we need to examine the meaning of ‘validityof arbitration agreement’ as occurring under Section 8 of the Act. Thereis no doubt that ‘validity’ to be examined under Section 8(2) of the Act,could be interpreted to mean formal validity as expressed under Section7 of the Act. Such an interpretation would operate as full application ofthe negative facet of Section 16, as the jurisdiction of the Court to step-inat the -reference stage would be limited. However, the burden of theprecedents stops us from accepting such narrow interpretation.

47. This brings us to the issue whether the issue of ‘arbitrability’can be analyzed by the Courts under Section 8 or 11 of the Act?

48. There is no doubt that ‘arbitrability’ has acquired variousmeaning around the world. In this context, this Court is required to firstidentify the various meaning for the aforesaid term, in order to recognizeits meaning in the Indian context. Outside the United States of America,the term “arbitrability” has reasonably precise and limited meaning,relating to whether specific classes of disputes are barred from arbitrationbecause of national legislation or judicial authority. In the United Statesof America, arbitrability also refers to the complicated balance betweencourts and arbitrators regarding who should be the initial decision-makeron issues such as the validity of the arbitration agreement. Out of thetwo meanings, we subscribe to the international flavor, which is one ofthe cherished legislative intentions, i.e., to bring the arbitration act intune with the global march. Having ascertained the meaning of arbitrability,we need to analyze whether arbitrability could be determined by theCourt at the reference stage.

49. No doubt, arbitrability finds close nexus with the validity ofthe arbitration agreement, yet we need to observe the unique nature ofthe arbitration agreement, which is bundle of contractual andjurisdictional elements. Even if Tribunal comes to an understandingthat there exists valid arbitration agreement, still it does not mean thatcertain subject matters are arbitrable per se. This distinction is requiredto be kept in mind.

A50. Section 34 (2)(b) provides the statutory basis for objectingthat an award which may not be capable of being settled by arbitration,or is against the public policy of India. The legislative intention of notarbitrating issues of public policy are intertwined with the fact thatmonopolies of the State activities should not be subject matter of privatetribunal, as the concerns of the State cannot not be dealt effectively.BFurther, an award, which has an erga omnes effect on third parties,would not be in tune with the contractual nature of arbitration, which isbinding on the consenting parties alone. However, this feature alone,does not explicitly mandate that the tribunal cannot first adjudicate aclaim based on the public policy argument.C51. It is to be noted that whether subject matter can or cannotbe arbitrated should necessarily be dealt on case to case basis, ratherthan having bold exposition that certain subject matters are incapableof arbitration. This case is one such example of over-broad ratio,expounded by this Court by laying that certain subject areas cannot beDarbitrated per se. At this juncture, we may observe the case of The

London Steamship Owners’ Mutual Insurance Association Ltd v TheKingdom of Spain and The French State,[2015] EWCA Civ 333.The case relates to an oil spill off the coast of Spain and Francefrom vessel named ‘The Prestige’, which resulted in the Governmentof Spain and France taking action against the Captain of the ship andEother officers under the Spanish Criminal Code, as well as instituting acase against the Owner to pay punitive damages under the Spanish PenalCode. It may be noted that the claim was also brought against the insurerof the ship for indemnity. Those claims were based both on the insurer’sobligation to indemnify the owners against their obligations under theFInternational Convention on Civil Liability for Oil Pollution Damage andon its obligation to indemnify them against their independent liability forthe tortious acts of the master, chief officer and chief engineer. Theinsurers took pre-emptive action by commencing arbitral proceedingsfor declaratory relief: declaration that France and Spain were boundby the arbitration clause provided in the insurers’ rules and that theGinsurers were not liable under the underlying contract. The relief soughtwas granted in favour of the insurers in the form of arbitral awards. Theinsurers attempted to enforce the arbitral awards in England before thejudgment was rendered in the Spanish legal proceedings. France andSpain opposed this enforcement of the arbitral awards on various grounds.HOne such reason, which was raised on behalf of Spain, was that the

matter was incapable of being resolved by arbitration. The Court whiledismissing the aforesaid objection, held that:

In my view this passage amounts to finding that conviction isnot an integral element of the cause of action. The distinction isimportant, because even if conviction were pre-condition tothe right to recover against the insurer, there would be no reasonwhy an arbitrator should not determine claim of this kind, takinginto account whether the condition has or has not been satisfied.He cannot, on the other hand, formally convict any person of acriminal offence.

This Court does recognize the jurisdictional differences anduniqueness between England and India, while placing reliance on thesame. However, the important aspect is that the plea of public policy isrequired to be specifically identified, pleaded and shown with respect tohow the award is contrary to the public policy. It may be possible thatthere may be certain claims abutting restricted sphere, which may notbe specifically hit by public policy or have erga omnes effect. If that beso, it would be too early at the stage of reference to determine the sameas it would require complete examination of the issue at hand, which ismore suited to be first dealt by the Tribunal and thereafter be looked intoat the stage of enforcement.

52. To this extent, even this Court in Avitel Post Studioz Limitedv. HSBC PI Holdings (Mauritius) Limited, Civil Appeal No. 5145 of2016 has held as under:

“16. In the light of the aforesaid judgments, paragraph 27(vi) ofAfcons [Afcons Infrastructure Ltd. v. Cherian VarkeyConstruction Co. (P) Ltd., (2010) 8 SCC 24] and paragraph 36(i)of Booz Allen [Booz Allen & Hamilton Inc. v. SBI Home FinanceLtd., (2011)5 SCC 532, must now be read subject to the rider thatthe same set of facts may lead to civil andcriminal proceedingsand if it is clear that civil dispute involvesquestions of fraud,misrepresentation, etc. which can be the subject matter of suchproceeding under section 17 of the Contract Act, and/or the tortof deceit, the mere fact that criminal proceedings can or havebeen instituted in respect of the same subject matter would notlead to the conclusion that dispute which is otherwise arbitrable,ceases to be so.”

A53. It is important to note that various countries have alreadyallowed inter-partes arbitration with respect to in rem rights concerningintellectual property etc., through statutory framework. It is worthwhileto study the feasibility of the same, if we want to provide impetus toarbitration.B54. On different note, we need to keep in mind that an arbitrationagreement would, as necessary implication, carry with it presumptionof one-stop mechanism. When parties decide to enter into an arbitrationagreement, they agree to take all their disputes before arbitration. Thispresumption, is rebuttable presumption. Therefore, Section 8 and 11has to be interpreted with sufficient strictness, wherein the jurisdictionCof the Court to decide issues should be limited to those expressly providedby the law.

55. This Court has dealt with various judgments on the issue ofarbitrability, which are required to be discussed at this point. The firstcase is of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd.,D(2011) 5 SCC 532, wherein Division Bench dealt with the ambit ofSection 8 and 11 (prior to amendment), qua subject matter arbitrability.This Court observed as under:

“32. The nature and scope of issues arising for consideration inan application under Section 11 of the Act for appointment ofEarbitrators, are far narrower than those arising in an applicationunder Section 8 of the Act, seeking reference of the parties to asuit to arbitration. While considering an application under Section11 of the Act, the Chief Justice or his designate would not embarkupon an examination of the issue of “arbitrability” orFappropriateness of adjudication by private forum, once he findsthat there was an arbitration agreement between or among theparties, and would leave the issue of arbitrability for the decisionof the Arbitral Tribunal. If the arbitrator wrongly holds that thedispute is arbitrable, the aggrieved party will have to challengethe award by filing an application under Section 34 of the Act,Grelying upon sub-section (2)(b)(i) of that section.”

The Court was cognizant of the fact that prior to the 2015amendment, Section 11 posits limited jurisdiction for the Courts to dealwith, in comparison to Section 8, which occurs at different stage. Inthis context, it is relevant to quote paragraphs 33 and 36, which reads asHunder:

33. But where the issue of “arbitrability” arises in the contextof an application under Section 8 of the Act in pending suit, allaspects of arbitrability will have to be decided by the court seizedof the suit, and cannot be left to the decision of the arbitrator.Even if there is an arbitration agreement between the parties, andeven if the dispute is covered by the arbitration agreement, thecourt where the civil suit is pending, will refuse an applicationunder Section 8 of the Act, to refer the parties to arbitration, if thesubject-matter of the suit is capable of adjudication only by publicforum or the relief claimed can only be granted by special courtor Tribunal.

X X X X X X

36. The well-recognised examples of non- arbitrable disputes are:(i) disputes relating to rights and liabilities which give rise to orarise out of criminal offences; (ii) matrimonial disputes relating todivorce, judicial separation, restitution of conjugal rights, childcustody; (iii) guardianship matters; (iv) insolvency and winding-upmatters; (v) testamentary matters (grant of probate, lettersof administration and succession certificate); and (vi) eviction ortenancy matters governed by special statutes where the tenantenjoys statutory protection against eviction and only the specifiedcourts are conferred jurisdiction to grant eviction or decide thedisputes.

The Court came to the aforesaid conclusion, of ascertaining certainsubject matters as non-arbitrable, on two main reasons, (1.) that certainmatters are excluded for examination by private forum; (2) that in remrights cannot be arbitrated.

56. In A. Ayysamy v. A. Paramsivam, (2016) 10 SCC 386, thisCourt had to deal with an issue concerning the arbitrability of fraudunder the Act, prior to the 2015 amendment. The Court by two separateopinions delivered by Justice A. K. Sikri and Dr. D. Y. Chandrachud,has recognized that the Court at the reference stage, could classify amatter and accordingly refer matter to arbitration which does not haveserious allegations of fraud.

57. In Emaar MGF Land Limited v. Aftab Singh, (2019) 12SCC 751, this Court held that Consumer Protection Act cases are notarbitrable. On perusal of the judgment, no doubt reliance was placed

Aon the Booz Allen Case (supra) and there is some discussion on thescope of Section 8 of the Arbitration Act. However, the thrust of thereasoning is not on the question of arbitrability, rather it was on the factthat the Consumer Protection Act, had an implied bar for referring amatter to arbitration, being special legislation. The difference is subtle,yet it is required to be recognized that the Consumer Protection Act,Bimpliedly barred the application of the Arbitration Act.

58. From study of the above precedents, the following conclusion,with respect to adjudication of subject-matter arbitrability under Section8 or 11 of the Act, are pertinent:

Ca)In line with the categories laid down by the earlier judgmentof Boghara Polyfab (supra), the Courts were examining‘subject-matter arbitrability’ at the pre-arbitral stage, priorto the 2015 amendment.

b)Post the 2015 amendment, judicial interference at theDreferencestage has been substantially curtailed.

c)Although subject matter arbitrability and public policyobjections are provided separately under Section 34 of theAct, the Courts herein have understood the same to beinterchangeable under the Act. Further, subject matterEarbitrability is inter-linked with in-rem rights.

d)There are special classes of rights and privileges, which enureto the benefit of citizen, by virtue of constitutional orlegislative instrument, which may affect the arbitrability of asubject matter.F59. It may be noted that the Act itself does not exclude any categoryof disputes as being non-arbitrable. However, the Courts have used the‘public policy’ reason to restrict arbitration with respect to certain subjectmatters. In line with the aforesaid proposition, the Courts have interferedwith the subject matter arbitrability at the pre-reference stage.

G60. However, post the 2015 amendment, the structure of the Actwas changed to bring it in tune with the pro-arbitration approach. Underthe amended provision, the Court can only give prima facie opinion onthe existence of valid arbitration agreement. In line with the amendedlanguage and the statutory scheme, the examination of the subject matterarbitrability may not be appropriate at the stage of reference under SectionH

8 of the Arbitration Act. It is more appropriate to be taken up by theCourt at the stage of enforcement under Section 34 of the Act. Havingsaid so, in clear cases where the subject matter arbitrability is clearlybarred, the Court can cut the deadwood to preserve the efficacy of thearbitral process.

61. At this stage word of caution needs to be said for arbitrators.They have been given jurisdiction to decide on the subject matterarbitrability. They are required to identify specific public policy in orderto determine the subject matter arbitrability. Merely because matterverges on prohibited territory, should not by in itself stop the arbitratorfrom deciding the matter. He/she should be careful in considering thequestion of non-arbitrability.

62. This brings us to the question of what prima facie case means,as is required to determine the non-existence of valid arbitrationagreement under Section 8 of the Act. The meaning and scope of ‘primafacie’ has greatly varied in common law as well as the civil law systems.Immediately, at least two meanings can be attributed to this term. First,it means party is said to have established prima facie case when hehas satisfied his burden of producing evidence. The second meaningpostulates that party has established prima facie case only when hehas made such strong showing that he is entitled to presumption inhis favor. Shin-Etsu Case (supra), categorically laid that prima facietest is to be adopted under Section 45 of the Act (prior to the 2015amendment). The Court was of the opinion that prima faciedetermination was seen as the view of Court, which can again be goneinto by the Tribunal.

63. In Antique Arts (supra) (subsequently over-ruled on adifferent point), this Court while following New India Assurance Co.Ltd. v. Genus Power Infrastructure Ltd., (2015) 2 SCC 424 held thatthat bald plea of fraud, coercion, duress or undue influence is notenough and the party who sets up plea, must establish the same on aprima facie basis by placing material before the Chief Justice/hisdesignate. This categorically establishes that prima facie case is relatableto establishment of initial presumption, rather than an evidentiarystandard.

64. The 246th Law Commission Report, in respect of scope andnature of pre-arbitral judicial intervention, states as under:

“28. The Act recognizes situations where the intervention of theCourt is envisaged at the pre-arbitral stage i.e. prior to theconstitution of the Arbitral Tribunal, which includes Sections 8, 9,11 in the case of Part I arbitrations and Section 45 in the case ofPart II arbitrations. Sections 8, 45 and also Section 11 relating to“reference to arbitration” and “appointment of the Tribunal”,directly affect the constitution of the Tribunal and functioning ofthe arbitral proceedings. Therefore, their operation has directand significant impact on the “conduct” of arbitrations. Section 9,being solely for the purpose of securing interim relief, althoughhaving the potential to affect the rights of parties, does not affectthe “conduct” of the arbitration in the same way as these otherprovisions. It is in this context the Commission has examined anddeliberated the working of these provisions and proposed certainamendments.

29. The Supreme Court has had occasion to deliberate upon thescope and nature of permissible pre- arbitral judicial intervention,especially in the context of Section 11 of the Act. Unfortunately,however, the question before the Supreme Court was framed interms of whether such power is “judicial” or an “administrative”power — which obfuscates the real issue underlying suchnomenclature/description as to —

— the scope of such powers — i.e. the scope of arguments whicha court (Chief Justice) will consider while deciding whether toappoint an arbitrator or not — i.e. whether the arbitrationagreement exists, whether it is null and void, whether it is voidable,etc.; and which of these it should leave for decision of the ArbitralTribunal.

— the nature of such intervention — i.e. would the court (ChiefJustice) consider the issues upon detailed trial and whether thesame would be decided finally or be left for determination of theArbitral Tribunal.

30. After series of cases culminating in the decision in SBP &Co. v. Patel Engg. Ltd., (2005) 8 SCC 618 , the Supreme Courtheld that the power to appoint an arbitrator under Section 11 is a“judicial” power. The underlying issues in this judgment, relatingto the scope of intervention, were subsequently clarified by

Raveendran, J. in National Insurance Co. Ltd. V. BogharaPolyfab (P) Ltd., (2009) 1 SCC 267,

32. In relation to the nature of intervention, the exposition of thelaw is to be found in the decision of the Supreme Court in Shin-EtsuChemical Co. Ltd. V. Aksh Optifibre Ltd., (2005) 7 SCC 234] ,(in the context of Section 45 of the Act), where the SupremeCourt has ruled in favour of looking at the issues/controversy onlyprima facie.

33. It is in this context, the Commission has recommendedamendments to Sections 8 and 11 of the Arbitration andConciliation Act, 1996. The scope of the judicialintervention is only restricted to situations where the court/judicial authority finds that the arbitration agreement doesnot exist or is null and void. Insofar as the nature ofintervention is concerned, it is recommended that in theevent the court/judicial authority is prima facie satisfiedagainst the argument challenging the arbitration agreement,it shall appoint the arbitrator and/or refer the parties toarbitration, as the case may be. The amendment envisagesthat the judicial authority shall not refer the parties toarbitration only if it finds that there does not exist anarbitration agreement or that it is null and void. If the judicialauthority is of the opinion that prima facie the arbitrationagreement exists, then it shall refer the dispute toarbitration, and leave the existence of the arbitrationagreement to be finally determined by the Arbitral Tribunal.However, if the judicial authority concludes that theagreement does not exist, then the conclusion will be finaland not prima facie. The amendment also envisages thatthere shall be conclusive determination as to whetherthe arbitration agreement is null and void. In the event thatthe judicial authority refers the dispute to arbitration and/or appoints an arbitrator, under Sections 8 and 11-respectively, such decision will be final and nonappealable.

1176SUPREME COURT REPORTS

AAn appeal can be maintained under Section 37 only in theevent of refusal to refer parties to arbitration, or refusal to”appoint an arbitrator.

(emphasis supplied)

65. The difference of statutory language provided under theBamended Section 8, which states refer the parties to arbitration unlessit finds that prima facie no valid arbitration agreement exists’ incomparison with the amended Section 11(6A), creates disparities whichneed to be ironed out. While the Court in the Shin-Etsu case(supra) and the Duro Felguera case (supra) recommended for findingCa valid arbitration agreement on prima facie basis qua Section 11,however, the negative language used under the amended Section 8mandates for referring matter to arbitration unless the Court primafacie finds that no valid arbitration exists. It is to be noted that findingof non- existence of arbitration agreement is final subject to the appealprocess only, without further scope for arbitration tribunal to decideDanything as there can be no further reference. If that be the case, thenthe usage of phrase ‘prima facie’ stands at odds with the establishedprecedents on prima facie standards. In this context, we can only stresson the requirement of quality legislative drafting protocols to eliminatesuch complications.

66. From the aforesaid discussion, we can conclude that therespondent/defendant has to establish prima facie case ofnon-existence of valid arbitration agreement, wherein it is to be summarilyportrayed that party is entitled to such finding. If party cannotsatisfy the Court of the same on the basis of documents produced,Fand rather requires extensive examination of oral and documentaryproduction, then the matter has to be necessarily referred to the Tribunalfor full trial. Such limited jurisdiction vested with the Court, is necessaryat the pre-reference stage to appropriately balance the power of theTribunal with judicial interference.

G67. The amendment to the aforesaid provision was meant to cutthe dead wood in extremely limited circumstances, wherein the respondentis able to ex-facie portray non-existence of valid arbitration agreement,on the documents and the pleadings produced by the parties. The primafacie view, which started its existence under Section 45 through Shin-EtsuCase (supra), has been explicitly accommodated even under domesticH

arbitration by the 2015 amendment with appropriate modifications.

68. Before we part with this aspect, it was extensively arguedbefore us that the test for the Court is to see whether party is able toestablish ‘good arguable case’ for establishing the existence of thearbitration agreement. However, the statutory language under Sections8 and 11 emphasizes on the threshold requirement for party forestablishing the opposite. No doubt, the aforesaid approach may havemerits. However, if the ‘good arguable case standard’ is integrated for aparty requiring to show non- existence, then the same would amount tojudicial activism. Such attempts to integrate alien formulations into theAct, which has already suffered sufficient judicial subjectivism, needs tobe dissuaded.

69. Having established the threshold standard for the Court toexamine the extent of validity of the arbitration agreement, as startingpoint, it is necessary to go back to Duro Felguera (supra), which laiddown:

“48…..From reading of Section 11(6-A), the intention of thelegislature is crystal clear i.e. the court should and need only lookinto one aspect—the existence of an arbitration agreement. Whatare the factors for deciding as to whether there is an arbitrationagreement is the next question. The resolution to that is simple —it needs to be seen if the agreement contains clause whichprovides for arbitration pertaining to the disputes which have arisenbetween the parties to the agreement.”

At first blush, the Court seems to have read the existence of thearbitration agreement by limiting the examination to an examination ofits factual existence. However, that is not so, as the existence ofarbitration agreement does not mean anything unless such agreement iscontractually valid. This view is confirmed by the Duro Felguera case(supra), wherein the reference to the contractual aspect of arbitrationagreement is ingrained under the Section 7 analysis. mere agreementis not legally binding, unless it satisfies the core contractual requirements,concerning consent, consideration, legal relationship, etc. In MayavatiTrading Case (supra) and Garware Wall Ropes Ltd. v. CoastalMarine Construction and Engineering Ltd., [2019] 9 SCC 209, theaforesaid stand has been confirmed. Therefore, the scope of the Courtto examine the prima facie validity of an arbitration agreement includes

Aonly the determination of the following:

92. Whether the arbitration agreement was in writing? or

93. Whether the arbitration agreement was contained in exchangeof letters, telecommunication, etc?

B94. Whether the core contractual ingredients qua the arbitrationagreement were fulfilled?

95. On rare occasions, whether the subject-matter of dispute isarbitrable?

At the cost of repetition, we note that Section 8 of the ActCmandates that matter should not be referred to an arbitration by acourt of law unless it finds that prima facie there is no valid arbitrationagreement. The negative language used in the Section is required to betaken into consideration, while analyzing the Section. The Court shouldrefer matter if the validity of the arbitration agreement cannot beDdetermined on prima facie basis, as laid down above. Therefore, therule for the Court is ‘when in doubt, do refer’.

70. Moreover, the amendment to Section 8 now rectifies theshort-comings pointed out in the Chloro Control Case (supra) withrespect to domestic arbitration. Jurisdictional issues concerning whethercertain parties are bound by particular arbitration, under group-companyEdoctrine or good faith, etc., in multi-party arbitration raises complicatedfactual questions, which are best left for the tribunal to handle. Theamendment to Section 8 on this front also indicates the legislative intentionto further reduce the judicial interference at the stage of reference.

71. Courts, while analyzing case under Section 8, may chooseFto identify the issues which require adjudication pertaining to the validityof the arbitration agreement. If the Court cannot rule on the invalidity ofthe arbitration agreement on prima facie basis, then the Court shouldstop any further analysis and simply refer all the issues to arbitration tobe settled.G72. Coming to the scope of judicial interference under Section 11,the 246th Law Commission Report noted that:

“31. The Commission is of the view that, in this context, the sametest regarding scope and nature of judicial intervention, asapplicable in the context of Section 11, should also apply to SectionsH

8 and 45 of the Act — since the scope and nature of judicialintervention should not change upon whether party (intending todefeat the arbitration agreement) refuses to appoint an arbitratorin terms of the arbitration agreement, or moves proceeding beforea judicial authority in the face of such an arbitration agreement.”

73. We are cognizant of the fact that the statutory language ofSection 8 and 11 are different, however materially they do not vary andboth Sections provide for limited judicial interference at reference stage,as enunciated above.

74. In line with our holding on question no. 1, generally it wouldnot have been appropriate for us to delve into the second question.However, considering that question of law has been referred to us, weagree with the conclusions reached by our learned brother.

75. Before we part, the conclusions reached, with respect toquestion no. 1, are:

a.Sections 8 and 11 of the Act have the same ambit with respectto judicial interference.

b.Usually, subject matter arbitrability cannot be decided at thestage of Sections 8 or 11 of the Act, unless it’s clear caseof deadwood.

c.The Court, under Sections 8 and 11, has to refer matter toarbitration or to appoint an arbitrator, as the case may be,unless party has established prima facie (summaryfindings) case of non-existence of valid arbitrationagreement, by summarily portraying strong case that he isentitled to such finding.F

d.The Court should refer matter if the validity of the arbitrationagreement cannot be determined on prima facie basis, aslaid down above, i.e., ‘when in doubt, do refer’.

e.The scope of the Court to examine the prima facie validityof an arbitration agreement includes only:

a.Whether the arbitration agreement was in writing? or

b.Whether the arbitration agreement was contained inexchange of letters, telecommunication etc?

1180SUPREME COURT REPORTS

Ac.Whether the core contractual ingredients qua thearbitration agreement were fulfilled?

d.On rare occasions, whether the subject-matter of disputeis arbitrable?

Kalpana K. Tripathy Referred questions answered and appeals and SLPs disposed of.