Analysing the Effect of the Supreme Court Judgement in Indian Oil Corporation Limited v. NCC Limited

[Dhiraj Abraham Philip is an Advocate-on-Record of the Supreme Court of India and a Partner at the law firm, Dua Associates]

The Supreme Court in its judgment dated 20 July 2022 in Indian Oil Corporation Limited v. NCC Limited, held that even after the insertion of sub-section (6-A) in section 11, the scope of inquiry by the Court was not confined to the examination of whether a binding arbitration agreement exists between the parties. The Apex Court held that though the Arbitral Tribunal had the jurisdiction and authority to decide the question of jurisdiction and non-arbitrability, the Court could examine the said issue in the section 11 proceedings if the facts were “very clear and glaring” and considering the specific clauses in the agreement.

The Apex Court overturned the finding rendered by the Delhi High Court that pursuant to insertion of section 11(6-A), the scope of enquiry by the Court was confined to ascertaining whether a binding arbitration agreement exists between the parties. The 2019 Amendment to the Arbitration Act has deleted section 11(6A). The SC in Vidya Drolia v. Durga Trading Corporation, has clarified that the rationale behind the insertion of section 11(6A) of the Arbitration Act would continue to apply and guide the Courts on its scope of jurisdiction the pre-arbitration stage.

The contract stipulated that only notified claims of the contractor included in the Final Bill could be referred to arbitration and the decision by the General Manager of Indian Oil Corporation Limited (‘IOCL’) regarding whether or not a claim is a ‘notified claim’ was to be decided by him prior to the arbitration proceedings. The Supreme Court held that if it was decided that a particular claim was not a ‘notified claim’, the claim would be an ‘excepted matter’, excluded from the purview of arbitration.

The Delhi High Court judgment, which was challenged before the Supreme Court had, held that where there is a dispute regarding the decision by the General Manager regarding whether a claim could be categorised as ‘notified claims’, the same was best left to be adjudicated by the Arbitral Tribunal. The High Court further held that unless there was an “open and shut case” that a particular dispute did not fall within the ambit of the arbitration agreement, the matter would have to be resolved by an Arbitral Tribunal. The Court would allow the tribunal to conclude on the matter given the doctrine of Kompetenz Kompetenz, recognised under section 16 of the Act.

The current judgment by the Supreme Court is significant and, at the same time, raises several concerns.

The 246th Law Commission Report suggested amendments to section 11 of the Arbitration Act as it was observed that a lot of time is spent on the appointment of arbitrators right at the outset of the proceedings, and thus, applications under section 11 were kept pending for many years.

Implementing this amendment, section 11(6A) was introduced in the Arbitration Act, which restricted the scope of the Court’s power requiring it only to examine whether an arbitration agreement exists at the stage of the section 11 proceedings. The Apex Court spelled out the Court’s limited jurisdiction in its judgment in Duro Felguera S.A. v. Gangavaram Port Limited, wherein the Court specifically noted that while the scope of power under section 11(6) was considerably wide based on the decisions in SBP & Co. v. Patel Engg Limited and National Insurance Co. Ltd v. Boghara Polyfab (P) Ltd. However, the legislative policy and purpose of the amendment to minimise the Court’s intervention was required to be respected. The decision in Duro Felguera S.A. was subsequently affirmed by the three-judge decision in Mayavati Trading Private Limited v. Pradyuat Deb Burman.

The Supreme Court reaffirmed the general principle in Vidya Drolia v. Durga Trading Corporation that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The Court, at the stage of section 8 or 11 proceedings, is not required to enter into a mini-trial or elaborate review to usurp the jurisdiction of the tribunal but would rather affirm and uphold the integrity and efficacy of arbitration.

However, the present judgment by the Supreme Court has held that even at the stage of deciding section 11 application, the Court could prima facie consider the aspect regarding ‘accord and satisfaction’ of the claims. The Court could also decide whether the dispute is non-arbitrable or falls within the excepted clause if the facts were “very clear and glaring” and the clauses in the agreement were specific.

By enlarging the scope of its jurisdiction in proceedings under section 11, the Court has only compounded the problem it itself has sought to remedy; the delay in adjudication of section 11 applications, which plagues the arbitral process in India. This despite the Apex Court’s recent observation in M/s Shree Vishnu Constructions v. The Engineer in Chief Military Engineering Service that it was a very sorry state of affairs that several applications under section 11 were decided and disposed of after a period of four years as it defeated the very purpose of the amended Arbitration Act.

The Apex Court had arrived at this observation based on a detailed report/statement it had sought regarding how many section 11 applications were pending before the Telangana High Court and from which year.

On analysing the information, the Supreme Court noticed that even an application filed as long ago as 2006 was still pending. Additionally, many applications under section 11 had been pending before the High Court for more than a year. It was consequent to this that the Apex Court had directed that all endeavours shall be made by the courts to decide and dispose of the applications for an arbitrator’s appointment within six months.

Further, it also sought information from all other High Courts regarding the pending applications under section 11(6) of the Arbitration Act. The Court on receipt of the data, noted that the pending applications again revealed a sorry state of affairs, as even on a national level, a large number of applications under section 11(5) and section 11(6) were pending. The Apex Court noted that if applications under section 11 were kept pending for several years, it would defeat the object and purpose of the enactment of the Arbitration and Conciliation Act, and the litigant may lose faith in the justice delivery system, which would not merely affect commerce and business in the country but ultimately affect the rule of law.

The Chief Justices of the High Courts across the country were accordingly requested to ensure that applications under section 11, which had been pending for more than one year, be decided within a period of six months from the date of the Supreme Court’s order.

This direction issued by the Apex Court to expedite adjudication in proceedings under section 11 was a welcome step in the right direction.

However, the recent pronouncement by the Apex Court enlarging the scope of jurisdiction under section 11 is likely to lead to applications before the High Court and Supreme Court taking significantly longer for adjudication and disposal.

The second concern arising from the judgment is that the Apex Court affirmed and permitted a party to the dispute, namely, IOCL’s General Manager to decide regarding ‘notified claims’, which could be excluded from the ambit of the arbitration agreement and hence non-arbitrable.

The unilateral decision by a party to the dispute by affixing a benchmark, as noted by the High Court, is problematic as a party to the dispute cannot be vested with unbridled power to decide whether a particular claim is an ‘excepted matter’ and hence non-arbitrable.

In cases where the contract clearly spells out the scope and ambit of ‘excepted matters’, a problem is unlikely to arise. However, where there is a serious dispute regarding whether a particular matter is covered within the ‘excepted matter’ category, parties ought to be left to raise the issue before the tribunal under section 16 of the Act regarding the tribunal’s jurisdiction.

The Delhi High Court judgment in the matter, which the Apex Court overturned, had recognised this legal principle and held that where there was a dispute regarding whether the contractor’s claims could be categorised as ‘notified claims’, the dispute would have to be adjudicated and resolved by the Arbitral Tribunal. Similarly, it held that issues regarding accord and satisfaction of the claims or disputes regarding the same would also have to be decided by the tribunal.

While the exact effect of the judgment on pending section 11 applications in High Courts and before the Supreme Court remains to be seen, the current order is likely to find Courts wading into disputed questions of fact and finding themselves forced to adjudicate on issues such as arbitrability of the dispute, jurisdiction of the tribunal; matters which are best left to the Arbitral Tribunal.

Dhiraj Abraham Philip

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