By: Rishi Raj Mukherjee and Raj Shekhar (National University of Study and Research in Law, Ranchi)
The Pravin Electricals v. Galaxy Infra has brought to light a crucial anomaly that exists in the Arbitration and Conciliation Act, 1996 (“Act”). The conundrum that exists between Section 8 and 11 of the Act was deliberated upon by a three-judge bench of the Supreme Court of India (“court”). The reason for this discrepancy could be traced back to the court’s verdict in Vidya Drolia v. Durga Trading, where the role of judicial authority was affirmed to be restricted to ascertaining only the prima facie existence of an arbitration agreement. While examining the two provisions, the court was bewildered to come across the issue of appeal that has been created as a result of judicial and legislative actions. While the decision of the authority to refuse reference to arbitration is under Section 8 is appealable, a refusal to appoint arbitrators under Section 11 has been made immune to the judicial scrutiny and hence has been rendered non-appealable. In light of the same, this article tries to analyse the scope of judicial intervention under Sections 8 and 11 of the Act while also finding a rational reason behind such differentiation. Towards the end, a critical analysis of the validity and potential negative impacts have been discussed in brief
The Complementary Nature of Section 8 and Section 11
Section 8 and Section 11 of the Act are complementary in nature and the same has been affirmed in the case of Vidya Drolia (Para 15). Sec 8 is one of the most resorted to the provision of the Act as it deals with the initiation of arbitration proceedings. This provision gives the judicial authority the power to refer parties to arbitration, as long as it is satisfied that a prima facie valid arbitration agreement exists between the parties. The other provision of Section 11 comes into play in the later stages when the parties fail to appoint an arbitrator. It basically facilitates the appointment of arbitrators, by empowering the judicial authority under Sections 11(4)-11(6) to take measures for an arbitrator’s appointment at the request of either of the parties. Thus, it is evident that both the provisions are intertwined in their existence and go hand in hand. The 2015 Amendments to the Act, introduced a new Section 11(6A) which tried to further clarify the intent behind the sub-sections by stating that the appropriate judicial authority should confine its examination to only “the existence of an arbitration agreement”.
Understanding “Prima Facie”: Analysing the Judicial Understanding
The Court in its majority view in the case of Vidya Drolia has clearly stated that the nature and scope of the “prima facie” review were introduced to prevent the undermining of tribunals’ jurisdiction. The major contention is that the existence of judicial authority is for facilitating the arbitration process and not posing a hindrance. The major intention behind parties to opt for arbitration is the speedy disposal it offers. If the courts are to intervene, taking into consideration the long-pending queue of litigation, it would defeat the very purpose of the arbitration. Thus, the power of the court was kept limited to only a prima facie standard check and was not expanded to include a full-fledged or final review. This is because a final review would include an extensive investigation into the records, agreements, papers, communications, or other exchanges between the parties to determine whether an agreement referring to arbitration existed. Therefore, in the words of Justice Khanna in Vidya Drolia the courts’ review is only to “weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes”.
The Law Commission Report and the 2015 Amendment: Defining the Prima Facie Standard
The cases of SBP & Co. v. Patel Engineering Ltd. and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. (both the cases were decided before the 2015 amendment) clarified the role of Chief Justice when it comes to an application under Section 11, and determined it to be of judicial nature rather than the prima facie standard. Further, in both the decisions it was implicitly clarified that while ascertaining the existence of an arbitration agreement, the Chief Justice could examine preliminary issues to a greater depth and wasn’t limited to just the prima facie standard which exists today. However, with the introduction of the 2015 Amendment two Sections, namely 11(6A) and 11(6B) were added and it was made clear that the appointment of arbitrators is not a judicial function and such interventions by judicial authorities need to be minimized.
To put an end to this ambiguity surrounding the scope of judicial authority, the Law Commission of India, in its 246th Report, recommended that prima facie standard should be applied while dealing with Sections 8 and 11 of the Act. The reasoning as per the report behind this move was that both of these provisions existed to prevent delays in arbitration proceedings and the major purpose behind these was identical, i.e. to compel and force parties to abide by their contractual understanding. This reasoning of the report was further affirmed by the Court in SBP & Co. v. Patel Engg. Ltd.and reaffirmed in the Vidya Drolia Case, which has since then become an accepted understanding of the relation between the two sections.
Thus, owing to their complementary nature and a common goal, setting different standards for judicial authority in the two cases was impermissible. A reference was made to the case of Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd. where the prima facie standard was applied to applications made under Section 45 of the Act and on basis of this explanation and example an amendment to introduce prima facie standard was recommended. However, the Arbitration and Conciliation (Amendment) Act, 2015 was as this recommendation of the Commission was not incorporated and the ambiguity continued.
The Hon’ble court in the case of Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, tried to implement the prima facie standard and specified that the court’s duty was limited to only look into the existence of the agreement and all other issues were to be dealt by the appointed arbitrators. This stance was further consolidated in the Vidya Drolia case where it was held that the “scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted.” With these two judgments, the ambiguity was finally put to an end.
The Appeal Conundrum: Validity and Issues
After the above deliberations it can be easily concluded that while going through Section 8 and Section 11 of the Act, the courts will decide only on the existence of an arbitration agreement and that too based on the prima facie standard. This would entitle the courts to dismantle the arbitration process at the very initial stages if they find no agreement to that effect. However, as we have seen in numerous examples, the courts can sometimes err in their judgments due to flawed reasoning or other related issues. Thus, Section 37 of the Act lists those orders by a judicial authority that are appealable. The 2015 Amendment to clause 1(a) made it clear that the parties who have been refused arbitration under Section 8 can appeal such a decision. However, no such provision exists in cases of an order refusing the appointment of an arbitrator under Section 11 of the Act.
Such differential treatment of provisions is not permissible because they are complementary and are also subject to appeal to the same prima facie standard. This brings into question Article 14 of the Indian Constitution. As the standard of evaluation under both these sections is largely similar, any litigants on these two provisions would be seen as ‘similarly situated’. Further, as the classification in the present case is without reason or purpose, one litigant can appeal while the other cannot, it amounts to a denial of the right to appeal to Section 11.
It is pertinent to note that the doctrine of equality of opportunity permits discrimination, with reasons and prohibits discrimination without reason. This needs to be understood that discrimination with reasons means rational classification for differential treatment having nexus with constitutionally permissible objects. This idea of rational nexus behind differentiation was affirmed by the court in St. Stephen’s College v. University of Delhi and it is now an accepted jurisprudence and practice that the concept of equality before the law allows for discrimination but on rational and objective grounds.
However, in the present case, the differential treatment would attract the scrutiny of Article 14, which would see such differential treatment, not based on any rational grounds as the court has failed to record or present forth any reasoning for the allowing of appeal under one section and not allowing it under the other when both the sections are complementary, as being against the spirit of equality and would rule it out as void. The current position of laws lies in stark contrast to the recommendations tendered by the Law Commission of India. The 246th Report of Law Commission suggested reforms in the arbitration framework by dissecting Section 37 and recommending amendments and introduction of clauses to change the nature of orders made under both Sections 8 and 11 to appealable.
Conclusion
The fact that Sections 8 and 11 are the most resorted to provisions under the Act, make them one of the most important provisions of the Act. While the judiciary has done an applaudable job in ensuring the proper function, its efforts have been foiled by the legislature’s move of ignoring the Law Commission recommendations and not introducing amendments to address the issue of party induced delays. If we analyse the Court’s judgment in Pravin Electricals case, the court has indeed made a very valid observation that when two provisions which are not just complementary in nature but are also with identical roles and test standards, allowing parties to appeal against one of those and not against the other is out rightly arbitrary. Thus, it is the need of the hour for the legislature to make an amendment to Section 37 of the Act, to make Section 11 orders appealable. Only such a move can help in India’s becoming a pro-arbitration regime.
(The authors are second-year students at National University of Study and Research in Law, Ranchi. They have a keen interest in commercial arbitration, company law and competition law. They can be contacted at rishiraj.mukherjee@nusrlranchi.ac.in.)
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