[Kuberinder Bajaj is a Judicial Law Clerk at the Delhi High Court]
The Supreme Court, in its recent judgment in SBI General Insurance Co. Ltd. v. Krish Spinning, has comprehensively explained the scope and standard of judicial scrutiny while adjudicating an application under section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”). The Court retraced the existing jurisprudence on the scope of interference under section 11 of the Act to further restrict the scope afforded to courts while referring disputes to arbitration. The decision was passed in a factual backdrop where the contract between the parties had been discharged on the ground of “accord and satisfaction” (referring to an agreement (accord) between parties to settle a dispute by fulfilling a promise or payment that is different from what was initially owed). The Court was presented with the question of whether it can examine claims of accord and satisfaction in section 11 proceedings. Additionally, the Court explained the scope of judicial interference where the claims between the parties were barred by limitation by clarifying earlier precedents.
The disputes between the parties stem from an insurance agreement related to claims for damages caused by a fire that broke out at Krish Spinning company. Subsequently, a settlement agreement was arrived between the parties, wherein the company confirmed the receipt of compensation against goods damaged by fire. They issued a notice invoking arbitration to SBI General Insurance. Since the notice invoking arbitration failed to elicit a response, Krish Spinning approached the High Court of Gujarat seeking the appointment of an arbitrator. SBI contended that the disputes between the parties are not arbitrable given the settlement arrived between the parties. The High Court relied upon the judgment in Oriental Insurance Company Ltd. v. Dicitex Furnishing Ltd. to hold that the disputes between the parties should be referred to arbitration as an arbitration agreement existed between the parties. In this background, SBI challenged the order passed by the High Court of Gujarat.
The main issue before the Court was regarding the “scope and standard of judicial scrutiny that an application under section 11(6) of the Act can be subjected to when the plea of “accord and satisfaction” is taken by the defendant?”. The Supreme Court further discussed, in-depth, the contours of the power of the referral court while deciding a petition under section 11 of the Act.
The Supreme Court held that a referral court, at the stage of proceedings under section 11 of the Act, should only look at the prima facie existence of the arbitration clause. In addition to addressing the issues of “accord and satisfaction” and limitation, pleas such as ex-facie, frivolity, and dishonesty in litigation can only be decided by an arbitral tribunal. The Court also reaffirmed that grounds such as arbitrability of the subject matter are solely in the realm of adjudication by the arbitral tribunal.
Case Analysis
The scope of referral under section 11 has undergone numerous and frequent changes over time through legislative amendments and judicial pronouncements. In an attempt to put a stop to the conflicting decisions ‘referral jurisprudence’, the Supreme Court affirmed that a court’s jurisdiction at a referral stage is limited and is restricted by the doctrine of kompetenz–kompetenz, which allows the arbitral tribunal to rule on its jurisdiction.
The Court referred to Konkan Railway Corporation Ltd. v. Rani Construction Pvt. Ltd , which held that the power under section 11 of the Act is merely an administrative one which restricts judicial interference at a pre-referral stage, and the decision of SBP & Co v. Patel Engineering Ltd. which overruled Konkan Railway Corporation, and expanded the scope of sections 8 and 11. SBP & Co. was relied on in Boghra Polyfab v. National insurance Company Ltd.. Both decisions rendered a conclusion that expanded the scope of judicial interference while referring to a matter for arbitration. The legislature observed that this expansive scope was causing delays in referring the matters to arbitration and, therefore, introduced section 11(6-A) to the Act, which limited the scope of judicial interference at a pre-referral stage only to examining the “existence” of an arbitration agreement.
After this amendment, the Supreme Court, in Vidya Drolia v. Durga Trading Corporation, limited the interference of the court under section 11 to cases where it was ex-facie certain that the arbitration agreement was non-existent or invalid. While holding this view, the Court also expanded the scope of judicial interference by ruling that the court could also examine the question of the arbitrability of disputes at this referral stage. However, it clarified that such interference at the referral stage should be used consciously and only in exceptional circumstances. The intent behind such reasoning, among other things, was “to cut off the deadwood” and “to prevent wastage of public and private resources” by dismissing an ex-facie non-arbitrable dispute at the referral stage.
The decision in Vidya Drolia differed, to some extent, from the view taken in the earlier decisions of the Supreme Court in Duro Felgura v. Gangavaram Port Ltd. and Mayavati Trading v. Pradyuat Deb Burman which held that a referral court could not venture into questions apart from determining the prima facie existence of an arbitration clause. Further, in NTPC v. SPML, the Supreme Court, in the context of “accord and satisfaction”, propounded the test of the “eye of the needle” to examine claims under section 11. It presented a two-pronged test at the stage of referral:
The first prong examines the “existence and validity” of an arbitration agreement. The second prong of the test requires the court to examine claims that are “ex-facie and manifestly” non-arbitrable and meritless. In effect, the decision in NTPC ended up doing what the Court in Duro Felgura and Mayawati sought to avoid, i.e., courts venturing, at the reference stage, superficially into the merits of the dispute between the parties.
In SBI General Insurance, the Supreme Court has relied upon the landmark decision of a seven-judge bench in Interplay Between arbitration Agreements under A&C Act, 1996 & Stamp Act, 1899, In Re: to clarify and circumscribe the scope of examination under section 11. It held that the court, at a pre-referral stage, has to satisfy itself ‘only’ to a prima facie existence of an arbitration clause between the parties, and all other questions are to be left open for adjudication by the arbitral tribunal. The decision also clarifies that the tests laid down in the judgment of Vidya Drolia(arbitrability of claims) and NTPC (eye of the needle test and claims being ex-facie merits), although endeavour to minimise the extent of judicial interference, yet require the court to examine contested facts and evidence which is repugnant to the principles of modern arbitration.
In addressing the issue of “accord and satisfaction” the Supreme Court stated that such an issue is a mixed question of law and facts that comes within the arbitrator’s exclusive domain. The decision in SBI General Insurance now emphatically puts a quietus to the issue of interference of courts while referring a matter to arbitration under section 11 of the Act. The power of the courts, as it now stands, is limited to examining the existence of an arbitration agreement, and that, too, only on a prima facie basis. The decision in SBI General Insurance has also been relied upon in a recent judgment of the Apex Court in Cox and Kings v. SAP India Pvt. Ltd.
On the point of limitation, while expounding the ratio in Arif Azim Co. Ltd. v. Aptech Ltd., the Supreme Court observed that the only question which now concerns the courts at the stage of section 11 is examining whether the petition itself is filed within three years of invoking arbitration. This means that the limitation period for claims sought to be referred to arbitration would now need to be examined by the arbitral tribunal itself.
Conclusion
To sum up, SBI General Insurance remoulds the existing jurisprudence on section 11 by limiting the scope of examination at the referral stage to only the prima facie existence of an arbitration agreement. This ruling is instrumental in reducing the burden on courts to keep section 11 applications pending for preliminary evidentiary inquiry. As a matter of practice, many litigants oppose the appointment of an arbitrator by taking defences such as disputes not being arbitrable and/or barred by limitation. In essence, the objections raised by such litigants are like examining the merits of the dispute, albeit perfunctorily. The decision of the Supreme Court has not only clarified the position of law but has also paved the way for expeditious disposal of the applications filed under section 11 of the Act.
– Kuberinder Bajaj