APPEALS IN ARIBITRAL APPOINTMENTS – A NEED FOR REVALUATION

Markanda Advocates | May 12, 2021

Section 8, 11 and 37 of the Arbitration and Conciliation Act, 19961(The Act), are provisions relating to ‘reference to arbitration’, ‘appointment of arbitrators’ and the ‘scope of appealable orders’ respectively. The Hon’ble Supreme Court in a recent judgement delivered in the case of Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engineering Pvt. Ltd.,2 noted that the Parliament may need to have a re-look at Section 11 and Section 37 of the Arbitration and Conciliation Act, 1996 so that orders passed under Section 8 and 11 are brought at par with respect to their appealability. This case arose out of a petition filed under Section 11(6) of the Act, for appointment of a Sole Arbitrator.

FACTS

The Respondent, Galaxy Infra and Engineering Pvt. Ltd. (Galaxy Infra), is a company incorporated in Distt. Vaishali, Bihar and is in the business of providing consultancy services. The Appellant, Pravin Electricals Pvt. Ltd. (Pravin Electricals), provides services for electrical supplies. Pravin Electricals was awarded the work by South Bihar Power Distribution Company Ltd. (SBPDCL). Galaxy Infra allege that it had made substantial efforts under a Consultancy Agreement (Agreement) to facilitate Pravin Electricals in getting the contract for which it was entitled to commission. Pravin Electricals denied any such agreement. Galaxy Infra invoked Article 14 of the agreement, in which they nominated a Sole Arbitrator. Pravin Electricals denied execution of the same.

Galaxy Infra filed a petition under Section 11(6) of the Act for appointment of a Sole Arbitrator on the basis of the alleged agreement. The learned Single Judge of the Delhi High Court passed the impugned judgement on 12th May,2020 and held that the Agreement was indeed executed. The Court rejected Pravin Electricals’ assertion that the agreement was not signed by both the parties. The Hon’ble High Court, while relying upon Caravel Shipping Services Pvt. Ltd. v. Premier Sea Foods 3 and Jugal Kishore Rameshwardas v. Goolbai Hormusji4 , stated that it is not mandatory for an arbitration agreement to be signed by the parties. Consequently, the Court appointed Justice G.S. Sistani, a former Judge of the Delhi High Court, as the Sole Arbitrator to adjudicate the dispute. Pravin Electricals appealed before the Supreme Court.

HELD

The Apex Court, allowing the appeal, stated that there is indeed some documentary evidence pointing towards the fact that there exists “some dealing between the Appellant and the Respondent qua a tender floated by SBPDCL, but that is not sufficient to conclude that there is a concluded contract between the parties, which contains an arbitration clause.” The Court, relying upon Vidya Drolia v. Durga Trading Corporation5 (Vidya Darolia), held that the prima facie review can lead to only one conclusion on the facts of this case, “that a deeper consideration of whether an arbitration agreement exists between the parties must be left to an Arbitrator who is to examine the documentary evidence produced before him in detail after witnesses are cross-examined on the same.”

The Hon’ble Supreme Court set aside the order of Delhi High Court as far as it held that that there exists an arbitration agreement but not appointment of an arbitrator. The Court doubted the validity and existence of the arbitration agreement on factual terms but it refused to draw any conclusion regarding the same. Applying the precedents related to prima-facie review6 and parameters of review,7 the Court left to the discretion of the arbitrator to decide whether such an agreement exists or not. It further clarified that all issues must be decided without being influenced by the observations made by the Court.

SC ON REFERENCE TO ARBITRAL TRIBUNALS

Section 8 discusses power of a judicial authority to refer parties to arbitration where there is an arbitration agreement. Section 11(6) talks about appointment of an arbitrator where individuals responsible for appointment fail to do so. Section 11(6A) talks about examination of the existence of an arbitration agreement while Section 11(7) makes such appointments non-appealable. Sub-sections 6A and 7 of Section 11were omitted by The Arbitration and Conciliation (Amendment) Act, 2019 (Act 33).8

Sections 8 and 11 were amended following the 246th Law Commission Report. The Supreme Court in Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman9 (Mayawati Trading) reflected changes made by the 2015 amendment. This case delineated three kinds of issues when the Court is approached for appointment and mirrored the approach followed in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. (Bhoghara).10

In the first category, the Court will have to decide on issues determining whether the approached High Court is the forum conveniens or not and whether the party who has applied is a party to the arbitration agreement or not. The Court may choose to decide the second category of issues or it can leave them to the decision of the Arbitral Tribunal. These issues are related to determining whether the claim is a long-barred claim or not and whether the parties have concluded the contract/transaction. In the third category, the Court must leave the issues exclusively to the Arbitral Tribunal. These are issues related to jurisdiction of arbitral tribunal and the merits of the claims involved.

“PRIMA FACIE” TEST

In Vidya Drolia,11 the Court laid down similar parameters of review to what was followed in Boghara12 and Mayavati Trading.13 Furthermore, the Court followed that if it becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the Court. However, it must not undertake a detailed full review or a long-drawn review at the referral stage as it would obstruct and cause delay undermining the integrity and efficacy of arbitration as a dispute resolution mechanism. The Court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis.

When it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the Arbitral Tribunal.14 The prima facie review at the reference stage is to cut the weed off in straightforward cases. It is not full review but a primary first review. As held in Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd.,15 the Court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary, not a mini trial. Similarly, in Vimal Kishor Shah v. Jayesh Dinesh Shah,16 the test applied at the pre-arbitration stage was whether there is a “good arguable case” for the existence of an arbitration agreement.

IMBALANCE IN APPEALS

Section 8, 11 and 37 are provisions relating to ‘reference to arbitration’ and ‘appointment of arbitrators’ and the ‘scope of appealable orders’ respectively. Section 11(6A) was inserted following the 2014 report by Law Commission of India whereby the scope of examination in Section 11 was to be restricted to the ‘examination of existence of the arbitration agreement’. However, Act 3317 omitted Clause 6(A) along with Clause 7 of Section 11 which prohibited appeals against orders passed under Section 11. A party can only appeal under Section 37 against an order passed by a Court. Section 37 restricts the scope of filing an appeal to orders passed under Sections 8, 9, 34, 16 and 17. Regarding appeals against orders referring parties to arbitration, there was already an imbalance. A party could appeal against an order passed under Section 8 of the Act but a similar order under Section 11 was explicitly non-appealable by way of Section11(7). The 2019 amendment, instead of sorting out the imbalance, created a further uncertainty after the omission of Section 11(7). There exists no statutory provision to bar or to allow appeals against orders made under Section 11. The Hon’ble Supreme Court, in the case at hand, observed that Section 8 and Section 11 need to be at par with respect to appealability; and thereby advised the Parliament to have a relook at Sections 37 and 11(7).

SUMMARY

The decision of Hon’ble Supreme Court in the present case is reflective of the judiciary’s pro-arbitration approach. Additionally, such a decision affirming a prima-facie interference is also in consonance with international arbitration jurisprudence which generally asked courts not to review the merits of disputes that are meant to be arbitrated.18 An application under Section 8 of the Act is subject to a prima facie determination of the validity of the arbitration agreement. A prima facie determination of the validity of the arbitration agreement would entail a consideration of the factors laid down in Vidya Drolia.19 The omission of Section 11(6A) was with the intent to empower an arbitral tribunal with the authority to independently determine issues related to arbitration agreement without interference of courts. However, a limited prima facie review does not, in any way, interfere with the principle of competenz-competenz.20 The intention behind omission of Section 11(7) might have been to make orders under section 11 appealable. However, when the legislature chose not to explicitly mention the same, it created an air of confusion around appealability of orders passed under Section 11. The Parliament must seek for an amendment in the Act with respect to the relevant provisions so that orders made under Sections 8 and 11 are brought on par qua appealability.

1The Arbitration and Conciliation Act, 1996.
22021 SCC OnLine SC 190.
3(2019) 11 SCC 461.
4AIR 1955 SC 812.
5(2021) 2 SCC 1.
6Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd. (2005) 7 SCC 234 [hereinafter “Shin-Etsu”]; Vimal Kishor Shah v. Jayesh Dinesh Shah (2016) 8 SCC [hereinafter “Vimal Kishor”].
7National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. (2009) 1 SCC 267 [hereinafter “Bhoghara”]; Vidya Drolia, Supra
8Act 33 of 2019.
9(2019) 8 SCC 714.
10Bhoghara, Supra 7.
11Vidya Drolia, Supra 5.
12Bhoghara, Supra 7.
13Mayavati Trading, Supra 9.
14 Vidya Drolia, Supra 5.
15 Shin-Etsu, Supra 6.
16Vimal Kishor, Supra 6.
17 Supra 8.
18Stephen M Schwebel, International Arbitration: Three Salient Problems (Grotius Publications 1987), 3-6.
19Vidya Drolia, Supra 5.
20Vimal Kishor, Supra 6.

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