Analysing the Non-obstante Clause of Section 8 of the Arbitration Act

[Rajvansh Singh is a 3rd year student at National Law University Odisha]

In Aftab Singh v. Emaar MGF Land Limited, the complainants approached the consumer forum seeking possession of flat/villa and compensation from the builder in lieu of the delay in handing over the possession of the same. The builder contended that builder-buyer agreement contains an arbitration clause by virtue of which parties should be referred to arbitration. However, the National Consumer Disputes Redressal Commission (“NCDRC”) opined that the Consumer Protection Act is to safeguard the rights of consumer. Thus, any dispute related to the consumer’s rights cannot be referred to arbitration as such matters are reserved to be adjudicated by the special public forum established by law.

A two-judge bench of the Supreme Court (“SC”) agreed with the decision of NCDRC that an arbitration clause cannot limit the jurisdiction of consumer forum. In this post, I argue that the SC erred in dismissing the plea of builder and should have scrutinized NCDRC’s judgment in greater detail. This is because the latter has misinterpreted the non-obstante clause as provided in section 8 of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”).

What is Arbitrability?

‘Arbitrabily of disputes’ involves a simple question on whether a dispute can be adjudicated through arbitration or not. In India, the locus classicus on the subject isBooz Allen v. SBI. In this case the SC opined that there are two kinds of disputes that are inarbitrable:those that are to be adjudicated by a public forum established by law and those that are rendered inarbitrable because of their very nature. The reason for abovementioned rule has been explained vividly in the ratio:

“A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals.”

Traditionally, disputes pertaining to right in remare not arbitrable, but on the other hand disputes pertaining to right in personam can be submitted to arbitration. It is pertinent to note that the legislature has not classified disputes as inarbitrable. The same has been developed through judicial pronouncements.

There are three stages at which the issues of arbitrability can arise:

• While making reference to arbitration (section 8);
• During the arbitral proceedings; and
• At the time of challenging the award.

Tussle under section 8

While interpreting section 8, the SC has subscribed to two different opinions. Firstly, in cases like Booz Allen, Ayyasamy, and Natraj Studios, which were referred to in the present case, the SC held that when any arbitration agreement is valid and the dispute is not arbitrable or reserved to be adjudicated by special public fora, reference to arbitration cannot be made.

Secondly, the SC in P. Anand Gajapathi Raju v. P.V.G. Raju held that “nature of section 8 is peremptory”. This implies that presence of an arbitration agreement makes it mandatory for the court to refer the matter to arbitration provided: “(1) there is an arbitration agreement; (2) a party to the agreement brings an action in the Court against the other party; (3) subject matter of the action is the same as the subject matter of the arbitration agreement; (4) the other party moves the Court for referring the parties to arbitration before it submits his first statement on the substance of the dispute.” Further, the SC in Hindustan Petroleum Corpn. Ltd. held that once the arbitration agreement is recognized as valid, reference to arbitration has to be made in light of the mandatory nature of section 8.

Non-obstante clause and its interpretation

To settle the ongoing tussle and to limit the judicial intervention, section 8 was amended by adding a non-obstante clause, which reads – “….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.”

This implies that judicial authority is under obligation to refer the matter to arbitration, unless on a prima facie basis it finds there is “no valid arbitration agreement which exist” or the same is “null and void”. The Arbitration Act very well recognizes the principle of kompetenz-kompetenz. Relying on this principle, the arbitral tribunal should be the authority to determine if the dispute intended to be resolved by arbitration is arbitrable or not.

Section 34(2)(b) reads as follows: “the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.” This acknowledges the fact that if the arbitral tribunal fails to inspect the arbitrability of the matter, then the concerned court will quash the award based on it. Similarly, section 48(2) provides that if a matter is not arbitrable, the court can refuse to enforce the foreign award.

The NCDRC explained the purpose of amendment in following words: “the import of the Law Commission’s Report is very clear and limited – it deals with the fallout of the judgment in SBP & Co. v. Patel Engineering regarding the scope of judicial intervention in the context of the appointment of an Arbitrator, and nothing more.” Further, the amended section 8 does not aim to attack pre-amendment case laws. Hence, placing reliance on Skypack Couriers Ltd.and National Seed Corporation, the NCDRC opined that presence of arbitration clause would not be a bar for a consumer to file a suit before Consumer Court, as the suit is not arbitrable.

It is suggested that while deciding the case, the NCDRC totally misinterpreted the Law Commission Report. The Law Commission, headed by Justice A.P. Shah, submitted that intervention of courts at pre-arbitration stage has an adverse effect on the arbitral proceedings. The report stated in explicit terms that the test regarding scope of judicial intervention should be same for sections 8 and 11. While determining the nature of intervention, the approach of the SC in Shin-Etsu Chemicals Co. Ltd. v. Aksh Optifibre, i.e. “prima facie inquiry of the arbitration agreement” has to be followed. Thus, the effect of the amendment is not limited to section 11, but it also extends to section 8.

The newly amended section 8 cannot find its existence in Ayyasamy, Booz Allen, Skypack Couriers Ltd. and National Seed Corporation, which authoritatively opine that arbitration agreement will not bar the Consumer Court from entertaining the complaint made by the consumer. Hence, a blind reliance on these cases will never provide the correct picture regarding section 8. According to Ayyasamy, when an application under section 8 is made, the court will determine the nature of fraud before the parties are referred to arbitration. This implies that the court will have the power to interfere at pre-arbitration stage.  Thus, the judgment of Ayyasamy is per incuriam as it contradicts the legislative intent behind the amendment. By taking the amended section 8 into account the abovementioned judgments fail to set a good precedent.

Further, section 2(3) of the Arbitration Act states that if the dispute in question is referable by virtue of the provisions of this Act, it cannot be referred if such reference is barred under some other law. The intention behind sections 8 and 2(3) seems to contradict each other. It is suggested that section 8 read with section 5 should prevail over section 2(3) because it will fulfill the prime intention of legislature i.e. “to restrict the scope of judicial interference at pre-arbitration stage”.

Conclusion

A plain reading of the unamended section 8 of Arbitration Act shows that intervention of judiciary should be limited. However, the SC through various case laws held that intervention is acceptable to the extent of determining the arbitrability of the matter. In light of the newly amended section 8, such case laws should be declared invalid. Further, if there is a validity check of the arbitration agreement before the courts, the legislative intent behind the amendment will be defeated. Thus, in my opinion, the arbitral tribunal should be the only authority to decide on the issue of arbitrability at the pre-award stage, so that the purpose, which the provisions of the Act seek to fulfill, is not eroded.

– Rajvansh Singh