No; Courts to make a “Finding”, Prima Facie, as to Existence of a Valid Arb. Agreement, for ‘Reference to, or Appointment of’, Arbitrator.

Jojy George Koduvath & Saji Koduvath Advocate, Kottayam.

PART – I

Contents in a Nutshell

• There is a major change by 2015 Amendment on Arbitration and Conciliation Act, 1996 as regards (i) the reference for arbitration under Sec. 8, and (ii) the appointment of arbitrator under Sec. 11.
• After 2015 Amendment, for referring  parties to arbitration and for appointing arbitrator, the courts should have “FOUND“, ‘PRIMA FACIE’ –
  • (i) the EXISTENCE of the arbitration agreement and
  • (ii) the VALIDITY thereof
  • (in short, legitimacy of arbitrability).
• Sec. 8(1), as amended, reads as under:
  • “A judicial authority …. shall … refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”
• The arbitration agreement should be a ‘binding’ and ‘subsisting’ one, for qualifying it to be “valid” and “existing”.
• Referral proceedings are preliminary and summary  in nature, and do not envisage a “mini trial”. But, there are certain cases where the prima facie examination may require a deeper consideration. This prima facie examination is to make a “check” and to protect parties from being forced to arbitrate when the matter is demonstrably “non-­arbitrable” (See: Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1).
• The limited scrutiny, “through the eye of the needle”, is necessary and compelling. ” If there is the slightest doubt, the rule is to refer the dispute to arbitration” (NTPC Ltd. v. SPML Infra Ltd., 2023 SCC OnLine SC 389).
• The 5-Judge Bench of our Apex Court, in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495, affirmed the views in Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1, as to the requirement of a valid arbitration agreement for reference under Sec. 8 of the Arbitration Act.
• It is held by majority (3:2) in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. that an arbitration reference cannot be made by the court on the basis of an insufficiently stamped agreement.

Appointment of Arbitrators, Before 2015

Sec. 16(1)(a) of the Arbitration and Conciliation Act, 1996 provides that the arbitration clause in a contract is treated as independent of the other terms of the contract.

There being no specific direction (to the court) in the Arbitration Act, before 2015 Amendment, to decide on existence or validity of an arbitration agreement, while referring the parties to arbitration, under Sec. 8(1), and appointing arbitrator under Sec. 11, courts could have taken a liberal stand.

After 2015 Amendment

Courts Decide – Existence of Arb. Agreement and its Non­-arbitrability

There is a major change in the concept of ‘separability’ of the arbitration clause, after 2015 Amendment. The Amendment directed that the existence or validity of an arbitration agreement has to be ‘found’ by the Court, before referring the parties to arbitration, and appointing arbitrator, under the Arbitration and Conciliation Act..

Even before 2015, the general rule prevailed was that the arbitration agreement would cease to ‘exist’ by the expiry (end) of contract by efflux of time. It was made clear in P. Manohar Reddy & Bros. v. Maharashtra Krishna Valley Development Corporation, (2009) 2 SCC 494. It was pointed out-

• “An arbitration clause, as is well known, is a part of the contract. It being a collateral term need not, in all situations, perish with coming to an end of the contract. It may survive. This concept of separability of the arbitration clause is now widely accepted.”

Sec. 8(1) – Existence of a Valid Arbitration Agreement must be “Found”

Sec. 8(1) of the Arbitration Conciliation Act reads (after 2015 Amendment) as under:

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

Sec. 11(6A) existence of an arbitration agreement

Sec. 11(6A) of the Arbitration Act (inserted by 2015 Amendment) reads as under:

• “11. Appointment of arbitrators – (1) … (2) … (3) … (4) … (5) …
• (6A). 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.”

Arbitration Agreement is a Collateral Term, Independent of other Terms

In SMS Tea Estates Pvt Ltd. v. Chandmari Tea Co Pvt. Ltd., 2011-14 SCC 66, it is observed as under:

• “12. When a contract contains an arbitration agreement, it is a collateral term relating to the resolution of disputes, unrelated to the performance of the contract. It is as if two contracts — one in regard to the substantive terms of the main contract and the other relating to resolution of disputes — had been rolled into one, for purposes of convenience. An arbitration clause is therefore an agreement independent of the other terms of the contract or the instrument. Resultantly, even if the contract or its performance is terminated or comes to an end on account of repudiation, frustration or breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract.”

In Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Ltd., SCC 2019-9 SCC 209, it is pointed out that “these principles found statutory recognition” in Sec. 16(1). It reads as under:

• “16. Competence of arbitral tribunal to rule on its jurisdiction – (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose –
• (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
• (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”
  • See also: SMS Tea Estates Pvt Ltd. v. Chandmari Tea Co Pvt. Ltd., 2011-14 SCC 66, Enercon (India) Ltd. v. Enercon GMBH, 2014-5 SCC 1; Avitel Post Studioz Limited v. HSBC  Holdings (Mauritius) Limited, 2021-4 SCC 713.
• Note: It is beyond doubt that the intention of Sec. 16(1) the Act is not to resurrect an arbitration clause that cannot be invoked in cases –
  • (i)  where the period of limitation provided for suits is elapsed;
  • (ii) where there is death or end of contract by ‘breach’ by one party; or
  • (iii) where there is a rescission or alteration of contract under Sec. 62 of the Contract Act, and thereby the parties need not have performed the original contract.

‘Existence’ of Contract, Necessary – for Operation of Arbitration Clause

It was held by the Supreme Court, in Union of India v. Kishorilal Gupta and Bros., AIR 1959 SC 1362 (a case on rescission or alteration of contract under Sec. 62 of the Contract Act), as under:

• “10. The following principles relevant to the present case emerge from the aforesaid discussion:
  • (1) An arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but nonetheless it is an integral part of it;
  • (2) however comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation; it perishes with the contract;
  • (3) … (4) … (5) … (6) …..”
• The afore-stated passage in Union of India v. Kishorilal Gupta is quoted in:
  • Indian Drugs and Pharmaceuticals Limited v. Indo Swiss Synthetics Gem Manufacture Company Limited, 1996-1 SCC 54;
  • Sanjiv Prakash v. Seema Kukreja, 2021-9 SCC 732;
  • Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1.

The Apex Court decision, Union of India v. Kishorilal Gupta and Bros., AIR 1959 SC 1362, is referred to in Union of India v. Jagdish Kaur, AIR 2007 All-  67, as under:  

• “20. The suit was instituted by the landlady on 1 -7-2004 after expiry of term of agreement. Courts below have rightly held that after expiry of five years, the agreement was non-existent and the arbitration clause was not applicable. This view finds support from the law laid down by Hon’ble the Apex Court in Union of India v. Kishori Lal Gupta and Brothers, (1959) AIR SC 1362.”

See also: Cosme Farma Laboratories Ltd.  v. Shwarde Pharmaceutical Pvt.  Ltd., 2013-2 GoaLR 559.

Expiry of Contract by Efflux of Time – Can Arbitration Clause be Invoked?

It is beyond doubt that the arbitration clause cannot be invoked in a case where the period of limitation provided for suits is elapsed.

If the period fixed in a contract for sale of a property (where time is essence of contract) is over, and the vendor alleges breach from the part of purchaser, there will not be a valid and subsisting contract from the viewpoint of the vendor. In such a case –

• if a dispute arises (even within the limitation period for taking legal action), the “existence or validity of an arbitration agreement” has to be decided by the Court, for referring the parties to arbitration, under Sec. 8(1), and appointing arbitrator under Sec. 11, of the Arbitration and Conciliation Act.

End of Contract by Breach – Court to decide – Whether Arb. Clause be Invoked

Before the 2015 amendment, in Branch Manager, Magma Leasing & Fin. Ltd. v.  Potluri Madhavilata  (2009) 10 SCC 103,  the core question considered was whether the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract even if its performance has come to an end on account of termination due to breach. It was held as under:

• “18. The statement of law expounded by Viscount Simon, L.C. in the case of Heyman as noticed above, in our view, equally applies to situation where the contract is terminated by one party on account of the breach committed by the other particularly in a case where the clause is framed in wide and general terms. Merely because the contract has come to an end by its termination due to breach, the arbitration clause does not get perished nor rendered inoperative; rather it survives for resolution of disputes arising “in respect of” or “with regard to” or “under” the contract. This is in line with the earlier decisions of this Court, particularly as laid down in Kishori Lal Gupta & Bros.”

It is legitimate to say that this position does not continue in view of the amended provisions, after 2015.

If the Contract (with arbitration clause) says that the contract will “stand cancelled” or “become void” or “come to an end”, on breach of that contract, whether the arbitration clause will work in such a case, for fixing damages, may be, still, a matter of adjudication by the arbitrator. In any case, ‘arbitrability’ of the same has to be decided by the “court”, in the light of Sec. 8(1) and 11(6A).

Why ‘Prima Facie’ Review and Finding by ‘Court‘ u/S. 8(1) and 11 ?

• For referring the parties to arbitration, under Sec. 8(1) of the Arbitration and Conciliation Act, 1996 (as amended in 2015), and for appointing arbitrator under Sec. 11 –
  • the standard of scrutiny to examine the non-arbitrability of a claim by Referral courts is only prima facie; and the referral courts must not undertake a full review of the contested facts; they must only be confined to a primary first review (See: Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1; NTPC Ltd. v. SPML Infra Ltd., 2023 SCC OnLine SC 389)); and
  • the court has to (prima facie) “find” that a “valid arbitration agreement exists“.
• That is, the arbitration agreement should be a ‘binding’ and ‘subsisting’ one, for qualifying it to be “valid” and “existing”.
• There will be no “arbitrable” dispute if-
  • the contract is ‘ended’ (by virtue of the provisions of the contract), for breach by one party, and the party in breach is ready to pay the predetermined damages for breach (and nothing remains for arbitration).

Arbitration Clause in a Perished/Expired Contract, Arbitrator Not Appointed

Relying on Union of India v. Kishorilal Gupta and Bros., AIR 1959 SC 1362, it is held in Eigen Technical Service Pvt.  Ltd.  v. Vatika Limited,  2013-172 Pun LR  27: 2013-4 Arb LR 367, that arbitration clause in a redundant and perished contractby efflux of time, cannot be invoked. The court relied on an Allahabad decision stating as under:

• “High Court of Allahabad in a judgment dated 10.11.2006 passed in Writ Petition No. 21275 of 2006 titled as Union of India Thru. Secry., Ministry of Postal v. Jagdish Kaur has also observed that arbitration clause contained in an expired agreement is also deemed as expired and is no more valid.”

Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1

Our Apex Court, in Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1, made it clear-

• For appointing an arbitrator, Courts shall make a Prima Facie ‘finding’ under Sec. 11(6A) as to “Non­-arbitrability of disputes”; and 
• the prima facie examination is to make a “check” and to protect parties from being forced to arbitrate when the matter is demonstrably “non-­arbitrable”.

It is held in Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1, as under:

• “133. Prima facie case in the context of Section 8 is not to be confused with the merits of the case put up by the parties which has to be established before the Arbitral Tribunal. It is restricted to the subject-matter of the suit being prima facie arbitrable under a valid arbitration agreement. Prima facie case means that the assertions on these aspects are bona fide.
• 134. Prima facie examination is not full review but a primary first review to weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes. The prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straight forward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage. Only when the court is certain that no valid arbitration agreement exists or the disputes/subject-matter are not arbitrable, the application under Section 8 would be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary and not a mini trial… …
• 139. … Conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. There are certain cases where the prima facie examination may require a deeper consideration. The court’s challenge is to find the right amount of and the context when it would examine the prima facie case or exercise restraint. The legal order needs a right balance between avoiding arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the matter is clearly non-arbitrable.”

The Apex Court further observed as under:

• “153. Accordingly, we hold that the expression ‘existence of an arbitration agreement’ in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the Arbitral Tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.”
• 154.2. Scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted.
• 154.4. Rarely as a demurrer 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, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. ”
  • The afore stated passages from Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1, is quoted and followed in NTPC Ltd. v. SPML Infra Ltd., 2023 SCC OnLine SC 389.

Though Scope of scrutiny is Limited, it is Necessary and Compelling

NTPC Ltd. v. SPML Infra Ltd., 2023 SCC OnLine SC 389, without changing the foundations laid down by the Apex Court in earlier decisions, Dr. DY Chandrachud; CJI, made clear the position of law with clarity and emphasis. It is observed as under:

• “24. Following the general rule and the principle laid down in Vidya Drolia (supra), this Court has consistently been holding that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. In Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engg. Pvt. Ltd., (2021) 5 SCC 671, Sanjiv Prakash v. Seema Kukreja, (2021) 9 SCC 732, and Indian Oil Corporation Ltd. v. NCC Ltd., (2022) SCC OnLine SC 896, the parties were referred to arbitration, as the prima facie review in each of these cases on the objection of non-arbitrability was found to be inconclusive. Following the exception to the general principle that the court may not refer parties to arbitration when it is clear that the case is manifestly and ex facie non-arbitrable, in BSNL and Anr. v. Nortel Networks India (P) Ltd., (2021) 5 SCC 738, and Secunderabad Cantonment Board v. B. Ramachandraiah , arbitration was refused as the claims of the parties were demonstrably time-barred.
• 25. Eye of the Needle: The above-referred precedents crystallise the position of law that the pre-referral jurisdiction of the courts under Section 11(6) of the Act is very narrow and inheres two inquiries. The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant’s privity to the said agreement. These are matters which require a thorough examination by the referral court. The secondary inquiry that may arise at the reference stage itself is with respect to the non- arbitrability of the dispute.
• 26. As a general rule and a principle, the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. …
• 27. The standard of scrutiny to examine the non-arbitrability of a claim is only prima facie. Referral courts must not undertake a full review of the contested facts; they must only be confined to a primary first review and let facts speak for themselves. This also requires the courts to examine whether the assertion on arbitrability is bona fide or not. The prima facie scrutiny of the facts must lead to a clear conclusion that there is not even a vestige of doubt that the claim is non-arbitrable. On the other hand, even if there is the slightest doubt, the rule is to refer the dispute to arbitration.
• 28. The limited scrutiny, through the eye of the needle, is necessary and compelling. It is intertwined with the duty of the referral court to protect the parties from being forced to arbitrate when the matter is demonstrably non-arbitrable. It has been termed as a legitimate interference by courts to refuse reference in order to prevent wastage of public and private resources. Further, as noted in Vidya Drolia (supra), if this duty within the limited compass is not exercised, and the Court becomes too reluctant to intervene, it may undermine the effectiveness of both, arbitration and the Court. Therefore, this Court or a High Court, as the case may be, while exercising jurisdiction under Section 11(6) of the Act, is not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator, as explained in DLF Home Developers Limited v. Rajapura Homes Pvt. Ltd., 2021 SCC OnLine SC 781″

In BSNL and Anr. v. Nortel Networks India (P) Ltd., (2021) 5 SCC 738, it is held held as under:

• “45.1 …While exercising jurisdiction under Section 11 as the judicial forum, the court may exercise the prima facie test to screen and knockdown ex facie meritless, frivolous, and dishonest litigation. Limited jurisdiction of the courts would ensure expeditious and efficient disposal at the referral stage. At the referral stage, the Court can interfere “only” when it is “manifest” that the claims are ex facie time-barred and dead, or there is no subsisting dispute…” (quoted and followed in NTPC Ltd. v. SPML Infra Ltd., 2023 SCC OnLine SC 389).

N.N. Global Mercantile v. Indo Unique Flame – Contentions, in Substance

The legal disputes in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495, was placed before the Apex Court, treading following course:

• A suit was filed by the appellant, to enforce a contract.
• The defendant applied for reference under Section 8 of the Arbitration and Conciliation Act, the contract being contained an arbitration clause.
• Trial Court rejected the application.
• A Writ Petition was filed by the defendant challenging the Order. It was contended that the Arbitration Agreement was unenforceable as the (main) contract was unstamped.
• The High Court allowed the Writ Petition. (Hence the plaintiff became the appellant before the Supreme Court.)

It was argued before the Apex Court that the Arbitration Agreement in the contract was enforceable and could have been acted upon, even if the contract was unstamped and unenforceable under the Indian Stamp Act. The 2-Judge Bench of the Supreme Court, referred the matter to 3-Judge Bench.

The 3-Judge Bench of the Supreme Court, referred the case to 5-Judge Bench, pointing out that an arbitration clause would stand as a distinct, separate and independent from the substantive contract.  This is based on the doctrine of severability or separability. That is, when the parties enter into such a contract, there are two separate agreements,

• (i) the substantive contract and
• (ii) the arbitration agreement.

In this premise, the 3-Judge Bench opined as under: 

• Even if the main contract was bad for it was unstamped or insufficiently stamped, the arbitration clause could be enforced.
• The defect on insufficiency of stamp could be cured as provided in the Stamp Act, and therefore, it could not be said that an unstamped or insufficiently stamped instrument did not exist in the eye of the law.
• The failure to stamp a document, did not affect the validity or unenforceability of the document, but it merely rendered the document inadmissible in evidence.

Before the 5-Judge Bench of the Supreme Court, it was argued –

• by the respondents/defendants, on the basis of the relevant provisions of the Arbitration Act (especially Sec. 16), that an arbitration clause would stand as a distinct, separate and independent from the substantive contract and that an arbitration reference can be made by the court even if the arbitration agreement was insufficiently stamped; and
• by the appellant/plaintiff, in view of the provisions in the Indian Stamp Act (especially Sec. 33 and 35), that the arbitration reference could not be made by the court on the basis of an insufficiently stamped agreement. It was pointed out that unstamped or insufficiently stamped documents cannot be used as evidence for any purpose, as provided in the Stamp Act; and that for reference under Sec. 8 of the Arbitration Act the court has to specifically find that prima facie a “valid arbitration agreement exists“..

N.N. Global held – If Arb. Agreement Unstamped, No ‘Valid Arb. Agreement Exists‘

It is held, by majority (3:2), in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495, that an arbitration reference cannot be made by the court under Sec. 8 of the Arb. Act, on the basis of an unstamped or insufficiently stamped agreement.

The Majority affirmed the findings in this regard, in the two earlier 3-Judge Bench decisions.

• (i) Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 (it was held that an arbitration reference cannot be made on the basis of an unstamped or insufficiently stamped agreement).
• (ii) Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1 (it was held that landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations).

The majority judgment Para 110 and 111 of N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495, reads as under:

• “110. An instrument, which is eligible to stamp duty, may contain an Arbitration Clause and which is not stamped, cannot be said to be a contract, which is enforceable in law within the meaning of Section 2(h) of the Contract Act and is not enforceable under Section 2(g) of the Contract Act. An unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot, therefore, exist in law. Therefore, we approve of paragraphs-22 and 29 of Garware (supra). To this extent, we also approve of Vidya Drolia (supra), insofar as the reasoning in paragraphs-22 and 29 of Garware (supra) is approved.
• 111. The true intention behind the insertion of Section 11(6A) in the Act was to confine the Court, acting under Section 11, to examine and ascertain about the existence of an Arbitration Agreement.”

Section 33 and 35 of the Indian Stamp Act, 1899

Section 33 of the Indian Stamp Act, 1899 reads as under:

• 33. Examination and impounding of instruments – (1) Every person having by law or consent of parties, authority to receive evidence, and every person in charge of a public office, except an officer of police, before whom any instrument, chargeable, in his opinion, with duty, is produced or comes in the performance of his functions, shall, if it appears to him that such instrument is not duly stamped, impound the same.
• (2) … (3) …

Section 35 of the Indian Stamp Act, 1899 reads as under:

• 35. Instruments not duly stamped inadmissible in evidence, etc. – No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped:
• Provided that – (a) any such instrument shall, be admitted in evidence on payment of the duty with which the same is chargeable, or, in the case of an instrument insufficiently stamped, of the amount required to make up such duty, together with a penalty of five rupees, or, when ten times the amount of the proper duty or deficient portion thereof exceeds five rupees, of a sum equal to ten times such duty or portion;
• (b) …. (c) ….. (d) …. (e) …..

PART – II

Dispute Must have been Covered by the Arbitration Clause

It is held by the Supreme Court, in Zenith Drugs & Allied Agencies Pvt. Ltd. v. Nicholas Piramal India Ltd., AIR 2019 SC 3785, 2020-17 SCC 419, that for appointment of an arbitrator, there must have been an arbitration agreement, and the existence of the arbitration dispute must have been covered by an arbitration clause.

Effect of Fraud on Arbitration Agreement

In A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386, it was held as under:

• “25. ……..It is only in those cases where the court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence  or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by the civil court on the appreciation of the voluminous evidence that needs to be produced, the court can sidetrack the agreement by dismissing the application under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself…….”. (Quoted in: Zenith Drugs & Allied Agencies Pvt. Ltd. v. Nicholas Piramal India Ltd., AIR 2019 SC 3785, 2020-17 SCC 419)

It was pointed out in Zenith Drugs & Allied Agencies Pvt. Ltd. v. Nicholas Piramal India Ltd., AIR 2019 SC 3785, 2020-17 SCC 419, that the plea of fraud being raised in entering the compromise, the merits of such a plea could be decided only by the Civil Court upon consideration of the evidence adduced by the parties.

Validity Decided by Court; Arbitrators have no Conclusive Power

In Uttar Pradesh Rajkiya Nirman Nigam Limited v. Indure Private Limited, 1996-2 SCC 667: AIR 1996 SC 1373, it is held (even prior to 2015 Amendment) as under:

• 14. In “Law of Arbitration” by Justice Bachawat (2nd Edn.) at page 155 it is stated that
  • “the question whether matters referred to were within the ambit of clause for reference of any difference or dispute which may arise between the parties, it is for the Court to decide”. ….
• 15. The clear settled law thus is that the existence or validity of an arbitration agreement shall be decided by the Court alone. Arbitrators, therefore, have no power or jurisdiction to decide or adjudicate conclusively by themselves the question since it is the very foundation on which the arbitrators proceed to adjudicate the disputes.”

Conclusion

In N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495, it was argued –

• by one side, on the basis of the relevant provisions of the Arbitration and Conciliation Act, that an arbitration reference can be made by the court even if the arbitration agreement was insufficiently stamped; and,
• by the other side, in view of the provisions in the Indian Stamp Act, that the arbitration reference could not be made by the court on the basis of an insufficiently stamped agreement.

The Majority (3 Judges) pronounced the verdict accepting the latter contention.

Taking note of the divergence in the debated points, among Judges, it is observed by Hrishikesh Roy, J., one of the (two) judges who dissented from the view of the majority, laid down the following-

•  “… Let our minority opinion (self and Learned Brother Justice Ajay Rastogi, who has written a separate opinion), appeal to the brooding spirit of the future as also the powers of the legislature to examine the interplay between the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899; and to emphatically resolve the imbroglio to avoid any confusion in the minds of the stakeholders in the field of arbitration.”

Let the pointers be that as it may.

In any event, the legislature – as it is duty bound to ponder the welfare of the downtrodden, which is the majority – will have to consider the following are ground realities-

• 1. The majority of Execution Petitions that come before the Execution (civil) Courts are for realisation of amounts below Rupees 10 Lakh ; and the lion’s share of it is filed by the persons who are engaged, directly or indirectly, in Money Lending activity, or initiated by similar “Service Providers”; and the opposite parties thereof belong (comparatively) to lower strata.  
• 2. A large number of Execution Petitions that come before the Execution (civil) Courts are that from the uncontested Arbitration Awards from “Outside-States”.
• 3. There is no effective “legal frame” (rules) for fixing remuneration of the Arbitrators.

Read Blogs:

• What are Non-Arbitrable Disputes? When a Dispute is Not Referred to Arbitration in spite of Arbitration Clause
• Termination or Nullity of Contract Will Not Cease Efficacy of the Arbitration Clause

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Foot Note:

Sec. 8 of the Arbitration And Conciliation Act, 1996 (after 2015 Amendment)
Power to refer parties to arbitration where there is an arbitration agreement.
 (1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.
(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof:
Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by the other party to that agreement, then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that Court.
(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.


Sec. 11 A of the Arbitration And Conciliation Act, 1996
11. Appointment of arbitrators.
(1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.
(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.
(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.
(4) If the appointment procedure in sub-section (3) applies and—
(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or
(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment,
the appointment shall be made, upon request of a party, by the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court
(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court.
(6) Where, under an appointment procedure agreed upon by the parties,—
(a) a party fails to act as required under that procedure; or
(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure,
a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.
(6A) 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.
(6B) The designation of any person or institution by the Supreme Court or, as the case may be, the High Court, for the purposes of this section shall not be regarded as a delegation of judicial power by the Supreme Court or the High Court.
(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to the Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court is final and no appeal including Letters Patent Appeal shall lie against such decision.
(8) The Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court, before appointing an arbitrator, shall seek a disclosure in writing from the prospective arbitrator in terms of sub-section (1) of section 12, and have due regard to—
(a) any qualifications required for the arbitrator by the agreement of the parties; and
(b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator.
(9) In the case of appointment of sole or third arbitrator in an international commercial arbitration, the Supreme Court or the person or institution designated by that Court may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities.
(10) The Supreme Court or, as the case may be, the High Court, may make such scheme as the said Court may deem appropriate for dealing with matters entrusted by sub-section (4) or sub-section (5) or sub-section (6), to it.
(11) Where more than one request has been made under sub-section (4) or sub-section (5) or sub-section (6) to the Chief Justices of different High Courts or their designates, different High Courts or their designates, the High Court or its designate to whom the request has been first made under the relevant sub-section shall alone be competent to decide on the request.
(12) (a) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and sub-section (10) arise in an international commercial arbitration, the reference to the "Supreme Court or, as the case may be, the High Court" in those sub-sections shall be construed as a reference to the "Supreme Court"; and
(b) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and sub-section (10) arise in any other arbitration, the reference to the Supreme Court or, as the case may be, the High Court in those sub-sections shall be construed as a reference to the "High Court" within whose local limits the principal Civil Court referred to in clause (e) of sub-section (1) of section 2 is situate, and where the High Court itself is the Court referred to in that clause, to that High Court.
(13) An application made under this section for appointment of an arbitrator or arbitrators shall be disposed of by the Supreme Court or the High Court or the person or institution designated by such Court, as the case may be, as expeditiously as possible and an endeavour shall be made to dispose of the matter within a period of sixty days from the date of service of notice on the opposite party.
(14) For the purpose of determination of the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal, the High Court may frame such rules as may be necessary, after taking into consideration the rates specified in the Fourth Schedule.
Explanation.— For the removal of doubts, it is hereby clarified that this sub-section shall not apply to international commercial arbitration and in arbitrations (other than international commercial arbitration) in case where parties have agreed for determination of fees as per the rules of an arbitral institution.

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