I. Introduction
Section 8 of the Arbitration and Conciliation Act, 1996 [“Arbitration Act”] makes it obligatory for the judicial authority to refer the parties to arbitration “unless it finds that prima facie no valid arbitration agreement exists”. Section 11 of the Arbitration Act deals with appointment of arbitrators. The sections have had a chequered history while being analysed with respect to their scope, the level of scrutiny applied, and the essentials to be fulfilled before their application ismandated.
One such question that has often arisen is what ‘constitutes’ an arbitration agreement for the purposes of Section 8 and Section 11 of the Arbitration Act. The term ‘constitutes’ is the leading question, on whether ‘existence’ or ‘validity’ are the only two facets that the court would examine at this stage. The meaning of the terms has confounded Indian jurisprudence on arbitration and have led to several debates that shall be analysed.
The Law Commission, while dealing with what ought to be looked at during the Section 11 stage, stated that onlyexistence needs to be a matter of concern and other preliminary issues are precluded from consideration, as upheld by the Supreme Court. The distinction is also manifested in Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 [“Duro Felguro”], where the Court clarified that when looking at existence, nothing more is to be looked at than the arbitration agreement. However, the term ‘existence’ has also been read to include validity in the Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 [“Vidya Drolia”].
Against this backdrop of Sections 8 and 11 of the Arbitration Act, the validity-existence conundrum is explored by first, delving into the nuances of Section 8, second, understanding the scope of Section 11, and third, exploring the context provided to the debate by the Arbitration and Conciliation (Amendment) Act, 2015 [“2015 Amendment Act”] and Arbitration and Conciliation (Amendment) Act, 2019, [“2019 Amendment Act”].
II. Reference under Section 8 and the decided essentials: Questions of validity
A reference under Section 8 of the Arbitration Act is placed before a judicial authority to send the parties to arbitration in accordance with the arbitration agreement. The Supreme Court in the case of P. Anand Gajapathi Raju v. P.V.G. Raju, (2000) 4 SCC 539 [“PV Raju”], court laid down four essential requirements for referring a matter to arbitration under Section 8. Herein, one of the conditions was whether “there is an arbitration agreement”.
It may be noted that the unamended Section 8 existing at the time of the PV Raju judgement, did not provide for checkingthe validity of the arbitration agreement. In PV Raju, the Supreme Court while admitting the existence of a validarbitration agreement, went on to state that under a determination of existence of the arbitration agreement under Section 8, the judicial authority is required to give a finding on whether the party waived the right to invoke arbitration on the “substance of the dispute”. Further, unless there is an “unequivocal intention” to submit to court, Section 8 would have to be mandatorily applied. The Court impliedly examined the validity and subject matter of the arbitrationagreement to ascertain whether the dispute can be referred.
This was until the Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 [“Booz Allen”] case cameup where the Court dealt with the then undecided issue of ‘arbitrability’ in deciding the scope of Section 8 of the Arbitration Act. The Court distinguished between Section 8 and 11, by stating that the scope under Section 11 is morelimited than that under Section 8, and the issue of arbitrability will be decided by the Court under Section 8. In Russell on Arbitration, it has been rightly pointed that ‘not all matters are capable of being referred to Arbitration’.
Therefore, the Court in Booz Allen accorded three different meanings to Arbitrability based on
Power of the Arbitral Tribunal
Scope of the agreement
Reference to the dispute in Arbitration clause.
This test forms the basis for checking arbitrability. This judgment changes the approach of the courts, by enforcing theidea of arbitrability to be an enquiry made by the courts under Section
III. Appointment under Section 11: Valid existence or mere existence of the arbitration agreement?
The unamended Section 11 conferred the power to decide the issue of appointment on the Chief Justice or their Designate, with the idea of finality attached to a every such decision rendered in accordance with Section 11(7). However, adiscrepancy arose when the order by the Chief Justice of a High Court was subject to writ jurisdiction and subsequent appeal under Article 136 of the Constitution.
An interesting development arose from the seven Judge Bench dictum of SBP v. Patel Engineering, (2005) 8 SCC 618 [“Patel Engineering”] that dealt with the scope of Section 11 with respect to the powers of Chief Justice or his designate in deciding a Section 11 application under the Arbitration Act. A reference was made from the Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd., (2002) 2 SCC 388, on whether the under Section 11, is an administrative order or judicial decision. The court ended up concluding that a decision under Section 11 is an exercise ofjudicial power. The court in Patel Engineering held that such a decision provided by the Chief Justice is final, and cannot be subjected to a challenge. Further, the court while establishing the point of Section 11, noted that the scope ofSections 8 and 11 is similar, and the Court under these provisions is required to examine both existence and validity of the arbitration agreement.
IV. The status of Section 11(6A): 2015 Amendment recurring in the Section 8 versus Section 11 debate
Following a consultative effort by the Law Commission to bring reforms in the realm of arbitration, through its 246thReport attempted to changes the landscape altogether. The 2015 Amendment, that followed, bought about an overhaul in the way the judiciary handled pre - arbitration proceedings.
The addition of the words “prima facie validity” to Section 8 of the Arbitration Act and the introduction of Section 11(6A) to confine the issue of appointment, only to the ‘existence’ of arbitration agreement, was remarked as legislative overhaul. The basis of the position of law in Patel Engineering was legislatively overruled. Henceforth, in the judgements of Duro Felguera and the Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714, theexamination, after the amendment, confined to existence.
In a stark departure from Booz Allen where the emphasis was on arbitrability, post-amendment in Vidya Drolia, thereference order made a distinction between non-arbitrability on account of existence as opposed to non-arbitrability on account of the validity of arbitration agreement. The change of phrase may indicate the court’s view towards what ought to be relevant at the Section 11 stage, where instead of examination, the court was opting for limited review bydetermining what is non-arbitrable.
Ultimately, the legislature decided to omit the controversial Section 11(6A) vide the 2019 Amendment, however the apprehension regarding the anomaly of arbitrability remains answered as the omission has not been notified till date.
V. Giving finality to the question
The seven-judge bench in In Re: Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 [“In Re: Interplay”], categorically differentiated the ‘existence’ of an agreement from its ‘validity’ and limited the scope at the Section 11 stage to the confines of existence. Yet a turning point in the conclusion by Justice Chandrachud was – whether the arbitration agreement prima facie exists, might again fall fordetermination, especially when the arbitrator is the final word on the validity of the arbitration agreement.
The Apex court, by referring to the case of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 [“Garware”] stated that the Court in Garware was not dealing with the issue of validity of an unstamped agreement but on the point of “who decides existence of an arbitration agreement” in the context of Section 8 and 11 of the Arbitration Act. The court in In Re: Interplay concluded this discussion by deciding that “where Section 8 requires the referral court to look into the prima facie existence of a valid arbitration agreement, Section 11 confinesthe court’s jurisdiction to the examination of the existence of an arbitration agreement”.
Recently, in SBI General Insurance Co. Ltd. v. Krish Spinning, 2024 SCC OnLine SC 1754, the question raised was whether the issuance of a discharge voucher which was contested as a full and final settlement of the dispute, i.e. which was construed as an ‘accord and satisfaction’ of the contract, potentially barred arbitration. Further, the Court was required to assess the extent and criteria of judicial examination applicable to an application filed under Section 11(6) of the Arbitration Act, when the defendant raises a claim of accord and satisfaction. The Court held that a discharge voucher does not bar arbitration and that arbitration agreements within substantive contracts survive even after discharge by ‘accord and satisfaction’. Further, the ruling while relying on Duero Felguera and Vidya Drolia clarifies that at the stage of appointing an arbitral tribunal, issues of accord and satisfaction should not be examined. This ruling underscores the limited judicial scrutiny at the Section 11 stage, ensuring that disputes can proceed to arbitration despite claims of settlement.
VI. Conclusion
The journey of the whole debate has seen a general conflation between Section 8 and Section 11 of the Arbitration Act. From the decision in PV Raju, where this ‘validity – existence’ equation arose, to Vidya Drolia, where it was held thatexistence includes validity, to the In Re: Interplay decision which states that powers under Section 8 and 11 are different, and therefore impliedly overrules Vidya Drolia by taking note of the pending omission notification of Section 11(6A).
It remains to be seen whether a notification of the omission of Section 11(6A), necessitate a subsequent authoritative ruling, particularly to address whether the principle established inPatel Engineeringrevives and whether the decision inIn Re: Interplaycreates a conflict on this matter. Such legislative action could reignite debates on issues that had seemingly reached a resolution.
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