Existence and validity and of an arbitration agreement, and arbitrability of the dispute can be examined in proceedings under Section 8 and Section 11 ACA. The court should interfere in limited cases where it is plainly arguable that the arbitration agreement is non-existent, invalid or the disputes non-arbitrable. (Supreme Court)

    Update by Editor

Vidya Drolia and others v. Durga Trading Corporation (Vidya Drolia II)

Court: Supreme Court of India | Case Number: Civil Appeal No. 2402 of 2019 | Citation: 2020 SCC OnLine SC 1018 | Bench: NV Ramana, Sanjiv Khanna and Krishna Murari JJ | Date of decision: 14 December 2020 | Judgment at:https://main.sci.gov.in/supremecourt/2018/26779/26779_2018_32_1501_25180_Judgement_14-Dec-2020.pdf

 

Vidya Drolia (II) is a judgment of a 3-judge bench of the Supreme Court of India(“SC” or “Sup. Ct.”). Sanjiv Khanna J has written a judgment for himself, NV Ramana and Krishna Murari JJ (pages 1 to 152). Ramana J has written a “concurring but a separate judgment” (pages 154 to 243).

The court’s judgment is not easy to read or understand. It is a pastiche of several cases and academic writings. More often than not, there is no unity in the paragraphs and one topic blends with the other in a way that even a seasoned reader might find difficult to follow the line of reasoning which supports the decision. It occupies 243 pages in double-spaced Arial font 14 (the style followed by the Supreme Court). The pages reduce to 90 (A4 size) on SCC OnLine. The NFRAL team has put together an Update that attempts to describe the court’s conclusions and the reasoning. Given the length of this Update—which was difficult to avoid—we set out here only a summary of the court’s key conclusions. The reader interested in the detailed description can read the full Update in a bookmarked PDF document here. 

These are the court’s key findings: 

  1. On the connection between Section 8 (power to refer to arbitration) and Section 11 ACA (appointment of an arbitrator)
    • Both provisions should be read as laying similar standards.
    • Both are ‘referral’ or ‘first look’ stage.
  1. On the meaning of the expression “existence of an arbitration agreement” in Section 11 ACA
    • Includes validity and arbitrability.
    • Includes “valid arbitration agreement” as used in Section 8 ACA.
  1. What is a “valid arbitration agreement?” (the expression used in Section 8)
    • An agreement that satisfies the requirements of Section 7 ACA, Section 10 of the Indian Contract Act, 1872, and other contract law requirements.
    • Includes an arbitrable matter (and thus the concept of validity includes arbitrability).
  1. What is the overall scope of the court’s power under Section 8 and Section 11 ACA, and who decides arbitrability: the court or the tribunal?

    • The arbitral tribunal can rule on its jurisdiction (because of principle of separability and the competence competence doctrine in Section 16 ACA). It is the preferred first authority to determine and decide all questions of non-arbitrability. The court has the “second look” power at the set-aside stage under Section 34 ACA.
    • But, at the ‘referral’ or the ‘first-look’ stage also, the domestic courts retain some power to review prima facie the existence and validity of the arbitration agreement in legitimate cases (which includes some types of arbitrability).
    • So, rarely, the court may interfere at Section 8 or 11 stage when it is manifestly, and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable. The power of the court in both proceedings is identical but extremely limited and restricted.
    • The court should apply the prima facie test to cut the deadwood.
    • Unless a party has established prima facie case of non-existence of a valid arbitration agreement, the matter should be referred [per Ramana J, point 10 below].
  1. What matters, and types of arbitrability, are for the court and what are for the arbitral tribunal?

    • These are what is stated in paragraph 22 of National Insurance Boghara Polyfab (2009) 1 SCC 267 [note: while para 22 of Boghara was for Section 11, the discussion in Vidya Drolia is in the context also of Section 8; Cf. paras 86 to 89 of Khanna J’s judgment].
    • Matters for the court are:
      • Territorial jurisdiction [per Boghara, 1st category].
      • Whether the applicant is a party to the arbitration agreement [per Boghara, 1st category].
      • Subject-matter arbitrability (on which the court may for legitimate reasons conduct a prima facie review) [added by the court in this case, see description below].
    • Matters for the tribunal (save in exceptional cases) are:
      • Whether the claim is dead (long-barred) or live [per Boghara, 2nd category].
      • Whether parties have concluded the contract/transaction by recording satisfaction of their rights and obligations [per Boghara, 2nd category].
      • Whether the claim falls within the scope of the arbitration clause [per Boghara, 3rd category]
      • Merits or any claim involved in the arbitration [per Boghara, 3rd category].
      • Issues relating to formation, existence, validity and (other) nonarbitrability matters would be connected with merits of the dispute and the facts. They are for the tribunal [added by the court in this case].
  1. How is subject matter arbitrability determined?

    • When the cause of action and subject matter relates to actions in rem.
    • When the cause of action and the subject matter of the dispute affect third party rights, have erga omnes effect, requires collective or centralized adjudication before one court or forum.
    • When the cause of action and the subject matter relates to the inalienable sovereign and public interest functions of the State.
    • When there is implicit non-arbitrability, that is, when by mandatory law, the parties are barred from contracting out and waiving adjudication by a special public forum.
  1. What is the prima facie test under Section 8 and Section 11 ACA?

    • Not full review or long drawn review. In some cases, prima facie examination may require a deeper consideration. The court’s challenge is to find the right balance between an obstructionist and a legitimate claim.
    • The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable, when summary proceedings would be inconclusive, where facts are contested, where delaying tactics are adopted.
    • When in doubt, refer [per Ramana J].
  1. Examples of matters arbitrable and nonarbitrable

    • These are arbitrable
      • Landlord-tenant disputes governed by the Transfer of Property Act, 1882 are arbitrable [overruling Himangni].
      • Allegations of fraud when they relate to a civil dispute [note: the court also said that it concurred with Avitel]
    • These cannot be arbitrated:
      • Insolvency
      • Intracompany disputes
      • Grant and issue of patents and registration of trademarks
      • Criminal cases
      • Matrimonial disputes relating to the dissolution of marriage, restitution of conjugal rights etc.
      • Matters relating to probate, testamentary matter etc.
      • The debt recovery tribunal matters (covered under the Recovery of Debts and Bankruptcy Act, 1993
      • Fraud, which vitiates and invalidate the arbitration clause
  1. On the meaning of the non-obstante phrase in Section 11 (6A)— “notwithstanding any judgment …confine to the examination of the existence of an arbitration agreement.”

    • Intended to overrule the 7-judge bench SBP case
    • Not intended to side-line or over-ride the settled law on arbitrability.
  1. On the negative language of Section 8 [per Ramana J]

    • Section 8 mandates referring a matter to arbitration unless the court prima facies finds that no valid arbitration agreement exists (rather than a finding prima facie that a valid arbitration agreement exists).
    • The “respondent/defendant” (sic party opposing arbitration) has to establish a prima facie case of non-existence.
    • Section 8 lacks quality legislative drafting. A finding that there is no arbitration agreement means that there would not be a reference. This is a final finding subject only to appeal. Effectively, a prima facie standard is provided to reach a conclusive finding.

 

 

 

 

 

 

 

0


Categories: Appointment of arbitrator |  Arbitrability |  Boghara Polyfab principle |  Booz Allen principle |  Competence Competence |  Erga omnes effect |  Existence of arbitration agreement |  Formal validity of arbitration agreements |  In personam |  In rem |  Nonarbitrability |  Power to refer parties to arbitration |  Public policy |  Section 11 |  Section 16 |  Section 8 |  Substantive validity |  Test of arbitrability |  Validity  

Leave a Reply

Your email address will not be published. Required fields are marked *