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11 October 2018
Arbitrations in India are predominantly conducted in an ad hoc manner. As per Law Commission Report 246 on Amendments to the Arbitration and Conciliation Act 1996 (246th Law Commission Report), the Arbitration and Conciliation Act 1996 (1996 act) as it stood before its amendment in 2015 neither promoted institutional arbitration nor discouraged parties from considering it.
In this context, the Arbitration and Conciliation (Amendment) Act 2015 (2015 amendment) – brought into effect on 23 October 2015 – was an attempt to reduce judiciary intervention in arbitration proceedings and promote a culture of institutional arbitration in India. One of the proposed changes in this regard – which, as per the 246th Law Commission Report, would go a long way in redressing the institutional and systemic malaise that had affected the growth of arbitration in India – was the amendment to Section 11 of the 1996 act, which provides for the appointment of arbitrators by the competent court. It was in this context that Section 11(6A) was introduced into the 1996 act vide the 2015 amendment. The section reads:
The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.
Before the 2015 amendment, the Supreme Court had repeatedly had the opportunity to scrutinise the scope and extent of judicial intervention in the context of Section 11 of the 1996 act. However, the question for determination was framed in terms of whether the power of the courts to appoint an arbitrator is an administrative or judicial power.
According to one school of thought, the court's power under Section 11 of the 1996 act was an administrative one. In Konkan Railway Corporation Limited v Mehul Construction Company(1) it was held that the powers of the chief justice under Section 11(6) of the 1996 act were administrative in nature and that the chief justice or their designate did not act as a judicial authority while appointing an arbitrator. The same view was reinforced by a larger bench of the court in Konkan Railway Corporation Limited v Rani Construction Private Limited.(2) This stance of the court was fortified multiple times by the judiciary in cases such as Shree Ram Mills Ltd v Utility Premises (P) Ltd(3) and Arasmeta Captive Power Co Private Limited v Lafarge India Private Limited.(4)
In Shin Etsu Chemicals Co Ltd v Aksh Optifibre(5) the court had taken a similar view in the context of Section 45 of the 1996 act. The majority ruled that the court's intervention should be merely preliminary and restricted with regard to the determination of the documents and material on record – including the arbitration agreement – while determining the scope of power of any judicial authority under Section 45 of the 1996 act in making or refusing a reference of a dispute arising from an international arbitration agreement.
On the other end of the spectrum was a series of cases that culminated in the majority decision given by a seven-judge bench in SBP and Co v Patel Engineering Limited,(6) wherein it was held that the power to appoint an arbitrator under Section 11 was a judicial power. The stance taken in SBP and Co was further clarified by Justice R V Raveendran in National Insurance Co Ltd v Boghara Polyfab Pvt Ltd.(7) In this judgment, the court segregated the preliminary issues that may arise for consideration in an application under Section 11 of the act into three categories:
As per such a categorisation, the chief justice or their designate would have to examine:
It would also be at their discretion to delve into issues of:
Only following such a determination based on an application made under Section 11 of the 1996 act could an arbitral tribunal proceed with issues specifically reserved for the tribunal – namely, whether the claim falls within the scope of the arbitration agreement and the merits of the claims involved in the arbitration. Thus, the scope of power vested in the court under Section 11(6) of the 1996 act was given a wide interpretation in view of the decisions in SBP and Co and Boghara Polyfab. This position was maintained until the amendment was implemented in 2015.
This debate regarding whether the power of the courts to appoint an arbitrator is an administrative or judicial power was temporarily resolved by the 2015 amendment and its introduction of Section 11(6A) into the 1996 act. The rationale behind the decision in Shin Etsu Chemicals Co Ltd v Aksh Optifibre(8) was discussed in the 246th Law Commission Report and reinforced by the commission in its recommendations on the amendment of Section 11 of the 1996 act. Therefore, through the introduction of Section 11(6A) into the 1996 act, based on the Law Commission's recommendations, it was made clear that the legislature intended to restrict judicial intervention at the first stage to an examination of the existence of an arbitration agreement in the application made to them under Section 11 alone. Keeping in mind the larger goals of the 2015 amendment, the recommended way of dealing with an application under Section 11 was premised on the prima facie existence of a valid arbitration agreement. If the judicial authority is of the opinion that prima facie the arbitration agreement exists, it shall refer the dispute to arbitration and leave the question of validity and enforceability of the arbitration agreement to be finally determined by the arbitral tribunal. However, if the judicial authority concludes that an arbitration agreement does not exist, the conclusion will be final and no reference shall be made.
The effect of the change introduced by Section 11(6A) vide the 2015 amendment was examined and discussed in detail by the court in Duro Felguera SA v Gangavaram Port Limited,(9) wherein the court opined that the legislative intent behind the section's introduction section was crystal clear. It was laid down that:
Having established that the role of the court was restricted to the examination of whether there was a valid arbitration agreement, the bench delved into what this examination would entail. The resolution to that was simple – it had to confirm whether the agreement contained a clause which provided for arbitration pertaining to the disputes which had arisen between the parties to an agreement. Subsequently, this view of the court's peripheral and primarily preliminary role in an application under Section 11 was reiterated by the court in its recent decisions, such as IBI Consultancy India Private Limited v DSC Limited.(10)
A diametrically opposite view to the minimally invasive stance of the court in Duro Felguera SA was taken in United India Insurance Co Ltd v Hyundai Engineering and Construction Co Ltd,(11) wherein Section 11(6A) of the 1996 act was effectively made redundant by the Supreme Court. The three-judge bench overturned the impugned decision of the Madras High Court that had followed the decisions in Duro Felguera, SA and Jumbo Bags Ltd v New India Assurance Co Ltd.(12) The underlying issue in the case of United India Insurance Co Ltd was whether the claims made by the parties were within the scope of the arbitration agreement between the parties, in terms of both the arbitrability of the subject matter and the scope of the arbitration agreement. By delving in to answer these questions, the court considered issues far beyond the scope of what is mandated under Section 11(6A) of the 1996 act and entered the realm of issues exclusively reserved for the arbitral tribunal, even as per SBP and Co as interpreted in Boghara Polyfab.
The stance taken by the court in United India Insurance, in a sudden turn of events, is an outlier in the general trend of developments in arbitrations in India. The Arbitration and Conciliation (Amendment) Bill 2018 (2018 bill) was passed by the Lok Sabha on 10 August 2018. The proposed amendments in the bill are based on the recommendations of the High Level Committee to Review the Institutionalisation of Arbitration Mechanism in India (the so-called 'Srikrishna Committee'), formed and chaired by Justice B N Srikrishna, a former Supreme Court judge.
The recommendations aim to facilitate:
In this context, the Srikrishna Committee recommended that Section 11 be amended to provide that the appointment of arbitrators under the section shall be done only by arbitral institutions designated by the court (in case of international commercial arbitrations) or the High Court (in case of all other arbitrations for such purpose), without the courts being required to determine the existence of an arbitration agreement, thereby further diluting the role of the courts under Section 11 of the 1996 act.
Keeping in mind the ideals that are the driving force for the recommended amendments as per the 2018 bill and looking at leading international arbitration jurisdictions such as Singapore, Hong Kong and the United Kingdom, it is evident that there is a clear predisposition in favour of minimal court involvement, specifically in the appointment of arbitrators. However, while such minimal involvement of the courts may be the desired objective, the complete exclusion of judicial intervention may not be the most effective strategy in such cases in India, given that the jurisdiction is still in the process of evolving to become a preferred venue for arbitration. Having said that, the judicial adventurism resorted to in United India Insurance – wherein Section 11(6A) of the 1996 act was marginalised by the court – may not be the correct approach either, as it obscures the clear constitutional division of powers between the legislature and the judiciary.
For further information on this topic please contact Jeevan Ballav Panda, Shalini Sati Prasad or Meher Tandon at Khaitan & Co by telephone (+91 22 6636 5000) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Khaitan & Co website can be accessed at www.khaitanco.com.
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