Court’s Refusal to Appoint Arbitrators: An ‘Appeal’ to Create Appeal Mechanisms

[Abhijeet Shrivastava is a third-year law student and Anujay Shrivastava is a law graduate (class of 2020), both from Jindal Global Law School, Sonipat.]

Recently, a three-judge bench of the Indian Supreme Court speaking through Nariman, J. in Pravin Electricals v. Galaxy Infra highlighted a crucial discrepancy of law in the Arbitration and Conciliation Act, 1996 (“Act”). Specifically, the court’s observation concerned a fragmentation created between section 8 and section 11 of the Act after another recent decision by the court in Vidya Drolia v. Durga Trading.

For context, section 8(1), as amended by the 2015 amendment, refers to the duty of courts to refer a dispute to arbitration, where it is “prima facie” found that a valid agreement exists. On the other hand, section 11(6) empowers the Supreme Court and the High Courts to appoint an arbitrator for the parties under exceptional circumstances where the arbitrator cannot be appointed by the parties themselves. Section 11(6A), which was inserted by the 2015 Amendment, requires courts considering such applications to “confine” their examination to the existence of an agreement. Here, an “agreement” has now been judicially read as a “valid agreement” in Drolia. Thus, when hearing either section 8 or section 11 applications, courts would consider the existence of a valid agreement.

A key difference between the two provisions is the absence of the word “prima facie” in the text of section 11(6A). From a purely textual reading, it appears that for section 8 applications, what is required is a summary finding of the existence of an agreement, while the final determination would be left to the arbitrator. In contrast, section 11 applications may require a full-fledged hearing by courts, with judges examining all the possible materials both parties may submit in their favour. However, such a reading was viewed as incorrect in Drolia. Here, the court has instead held that even for section 11 applications, courts can only conduct a “prima facie” review of whether an agreement exists. Consequently, the “prima facie” test from section 8(1) has been read into section 11(6A).

It is in reference to this holding that the court in Pravin Electricals has pointed out the following: “Whereas in cases decided under Section 8, a refusal to refer parties to arbitration is appealable under Section 37(1)(a), a similar refusal to refer parties to arbitration under Section 11(6) read with Sections 6(A) and 7 is not appealable”. As discussed, courts would examine the “prima facie” existence of a valid agreement in both categories of applications. However, while orders under section 8 refusing to refer parties to arbitration is appealable, identical orders under section 11 would be final.

In this post, we shall analyse the various negative impacts and the unconstitutionality of this discrepancy in Indian arbitration practice. Before exploring this impact, we shall first briefly outline the scope of this “prima facie” test as understood in both the cases and dissect the court’s rationale for reading the test into section 11.

“Prima Facie” Examination: Three Possibilities

As per Khanna, J.’s majority view in Drolia, the scope of a “prima facie” review is limited and restricted in order to respect tribunals’ kompetenz-kompetenz. This standard of review stems from a need to minimize judicial intervention in the conduct of an arbitration. Thus, the aim of the review is to aid and facilitate the arbitration process, and not to judicially “usurp” it. The underlying point is that given court’s workloads and long-drawn litigations, it would defeat the purpose of the arbitration if courts were to conduct a full-fledged and final review. The latter would entail examining all the possible records, documents, e-mails, or other exchanges between the parties to determine the existence of an agreement. Instead, this complex duty is entrusted to the arbitrator. As Khanna, J. in Drolia observes, the courts’ review is only to “weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes”.

In this regard, Ramana, J.’s concurring opinion succinctly summarises the scope of the inquiry to include: first, if the agreement was in writing, second, if the agreement was contained in letters, telecommunication, and so forth, third, whether “core contractual ingredients” were fulfilled vis-a-vis the arbitration agreement, and finally, whether its subject-matter is arbitrable.

In applying this test, there are three possibilities. Take, for instance, a situation where only the arbitrability of a dispute’s subject matter is contested. In Case 1, the court may “prima facie” find that the dispute is arbitrable. Here, the matter will be referred to arbitration. In Case 2, the court may have doubts and consider that only a detailed examination of facts, evidence, and witnesses could resolve the question. Here too, the court would refer the matter for the arbitrator to decide. As Ramana, J. put it, “when in doubt, do refer”.

The crux of the courts’ examination is whether the parties have a “plainly arguable case” or a “good arguable case”, as per the standards set in previous cases (here and here). That is, if a party can demonstrate that arbitrability is debatable, the matter will be left to the arbitrator’s decision. As an example, in Pravin Electricals,the court was faced with a Case 2 archetype, as there were extensive reports, documents, and witnesses to be examined. Based on these records, there was “prima facie” an “arguable case” from both sides as to the existence of a valid agreement, leading to a referral to arbitration. In both Case 1 and Case 2 archetypes, no right to an appeal would arise.

The last possibility is Case 3, where the court finds that there is no valid agreement, again for instance, since the subject matter of the dispute is non-arbitrable. This would comprise very rare situations (see here) where a “prima facie” reading would reveal non-arbitrability – for example, an agreement to refer criminal matters for arbitration, or those relating to sovereign functions such as police powers or eminent domain (matters in rem). Importantly, Case 3 findings would be “final” and not “prima facie”, as these matters would not be referred to arbitration for further review. Nonetheless, under section 37(1)(a), an appeal against Case 3 findings can be preferred, if the decision relates to section 8 applications. However, as per section 11(7), there would be no right to appeal in section 11 decisions.

Why Read “Prima Facie” Into Section 11?

The Law Commission’s 246th Report had recommended various amendments to the Act that were largely adopted in the 2015 Amendment. These recommendations included changes to sections 8 and 11, which led to how the provisions stand now. The report consistently recommended the adoption of the “prima facie” standard of review for both amended sections 8 and 11, and considered these sections to be “complementary”. The report also suggested an appeal provision for section 11 orders in the Case 3 archetype. Yet, neither the “prima facie” standard nor an appeal provision was introduced in the 2015 Amendment.

Many amendments have since been made to the Act, without accommodating a textual adoption of the “prima facie” standard in section 11. Generally, the refusal of the legislature to heed such suggestions despite multiple opportunities is taken as its intent against giving effect to the recommendation. It also altered the amendment to section 11 as framed by the report, potentially indicating this intention against a “prima facie” review. Notably, the 2019 Amendment had not altered this position. Consequently, has the court in Drolia erred in reading the “prima facie” standard into section 11? We believe that the position in Drolia is the correct one.

Forwarding a strong argument in its favour, the court in Drolia affirmed the overarching intention of the Act – which is to promote expeditious dispute resolution and minimize judicial intervention. However, even absent this teleological reading, the court in Drolia had recourse to the Statement of Objects of the 2015 Amendment, which stated its aim to “provide that while considering any application for appointment of arbitrator….[courts] shall examine the existence of a prima facie arbitration agreement and not other issues” [emphasis added]. This shows that even for section 11, it was the Parliament’s belief that courts would indeed limit their review to a “prima facie” standard. Therefore, Drolia in fact correctly heeds the Parliament’s actual intent, despite its seeming textual departure. Yet, the fact remains that section 11 decisions are without appeal. This position remains unchanged even after the 2021 amendment to the Act.

The Appeal Discrepancy: Undesirability and Unconstitutionality

It is clear that in considering both section 8 and section 11 applications, courts would examine the same question: whether there is a “prima facie” valid agreement, based on the factors outlined above. Finding that there is no such agreement would dismantle the arbitration process at the very outset. The principle behind the right to an appeal is simple: courts are not and cannot claim to be infallible. Thus, a litigant ought to have recourse to a higher court to seek justice in case the court of original jurisdiction errs. Should a court incorrectly hold that there is no valid agreement under a section 11 hearing, an affected party would be left hapless. This defeats the underlying pro-arbitration scheme of the Act and would compel parties to the long-drawn and costly affair of litigation. Needless to say, this also impacts the core of party autonomy, in that there is a vacuum of an appeal against a decision that may impair a valid arbitration agreement.

In practice, it is common for parties to attempt to obstruct the arbitration process with respect to the appointment of arbitrators, to ensure delays in their favour. It is to avoid such delays that the Supreme Court and the High Courts were granted the power to appoint arbitrators for the parties. However, suppose a party ABC causes such delays, in response to which party PQR applies to the courts under section 11. This may instead be strategically beneficial to obstructing party ABC since if the court holds that there is no valid agreement at all, party PQR would have no recourse to an appeal. Suppose again that the court erred in holding the agreement as invalid or non-existent. The effect of section 11 then, as it stands, is to promote the interests of a party that seeks to obstruct an arbitration, over the interests of a party that seeks to facilitate arbitration. Evidently, this too is abhorrent to the Act’s purposes, as well as the aims of the 2015 Amendment.

Moreover, in our view, the most fatal blow to this lack of appeal is a strong case that it is in violation of Article 14 of the Indian Constitution. As explained above, considering section 8 and section 11 applications requires the same examination. In Drolia, the court continually emphasized that there is no reason for the standard of review in this examination to differ across the two provisions, and affirmed the Law Commission’s view that they are complementary. Despite this, litigants in section 8 applications can appeal an impugned order, while section 11 litigants cannot. This classifies ‘similarly situated’ litigants into dissimilar circumstances, where the classification is without reason or purpose, and one class of litigants faces avoidable hardship. Therefore, the denial of the right to appeal to section 11 litigants is an instance of treating equals unequally through an unreasonable classification, in light of well-settled constitutional law jurisprudence on Article 14.

In conclusion, it is our hope that the Parliament heeds the Law Commission’s recommendation to create an appeal provision against section 11 decisions of the court of the first instance. This would be akin to the existing provision in section 37(1)(a) for section 8 decisions. To do so is not only in furtherance of India’s goal towards becoming a pro-arbitration regime, but also a correction of an existing constitutional defect in the Act.

– Abhijeet Shrivastava and Anujay Shrivastava