VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION

A that any legal character which it takes away from any such person ceased at the time from which such judgment, [order or decree] declared that it had ceased or should cease; and that anything to which it declares any person to be so entitled was the property of that person at the time from which such judgment, [order or decree] declares that it had been or should be his property.” A judgment in rem determines the status of a person or thing as distinct from the particular interest in it of a party to the litigation; and such a judgment is conclusive evidence for and against all persons whether parties, privies or strangers of the matter actually decided. Such a judgment “settles the destiny of the res itself” and binds all persons claiming an interest in the property inconsistent with the judgment even though pronounced in their absence. 21 By contrast, a judgment in personam, “although it may concern a res, merely determines the rights of the litigants inter se to the res”.22 Distinction between judgments in rem and judgments in personam turns on their power as res judicata,23 i.e. judgment in rem would operate as res judicata against the world, and judgment in personam would operate as res judicata only against the parties in dispute. Use of expressions “rights in rem” and “rights in personam” may not be correct for determining non-arbitrability because of the inter-play between rights in rem and rights in personam. Many a times, a right in rem results in an enforceable right in personam. Booz Allen & Hamilton Inc. refers to the statement by Mustill and Boyd that the subordinate rights in personam derived from rights in rem can be ruled upon by the arbitrators, which is apposite. Therefore, a claim for infringement of copyright against a particular person is arbitrable, though in some manner the arbitrator would examine the right to copyright, a right in rem. Arbitration by necessary implication excludes actions in rem.

31Copy pinpoint31. Exclusion of actions in rem from arbitration, exposits the intrinsic limits of arbitration as a private dispute resolution mechanism, which is only binding on ‘the parties’ to the arbitration agreement. The 21 G.C. Cheshire & P.M. North, Private International Law 12th ed. by North & Fawcett (London: Butterworth’s, 1992, p. 362 22 Ibid 23 G.C. Cheshire & P.M. North, Private International Law 12th ed. by North & Fawcett H (London: Butterworth’s, 1992

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courts established by law on the other hand enjoy jurisdiction by default and do not require mutual agreement for conferring jurisdiction. The arbitral tribunals not being courts of law or established under the auspices of the State cannot act judicially so as to affect those who are not bound by the arbitration clause. Arbitration is unsuitable when it has erga omnes effect, that is, it affects the rights and liabilities of persons who are not bound by the arbitration agreement. Equally arbitration as a decentralized mode of dispute resolution is unsuitable when the subject matter or a dispute in the factual background, requires collective adjudication before one court or forum. Certain disputes as a class, or sometimes the dispute in the given facts, can be efficiently resolved only through collective litigation proceedings. Contractual and consensual nature of arbitration underpins its ambit and scope. Authority and power being derived from an agreement cannot bind and is non-effective against non-signatories. An arbitration agreement between two or more parties would be limpid and inexpedient in situations when the subject matter or dispute affects the rights and interests of third parties or without presence of others, an effective and enforceable award is not possible. Prime objective of arbitration to secure just, fair and effective resolution of disputes, without unnecessary delay and with least expense, is crippled and mutilated when the rights and liabilities of persons who have not consented to arbitration are affected or the collective resolution of the disputes by including non- parties is required. Arbitration agreement as an alternative to public fora should not be enforced when it is futile, ineffective, and would be a no result exercise.24

32Copy pinpoint32. Sovereign functions of the State being inalienable and non- delegable are non-arbitrable as the State alone has the exclusive right and duty to perform such functions.25 For example, it is generally accepted that monopoly rights can only be granted by the State. Correctness and validity of the State or sovereign functions cannot be made a direct subject matter of a private adjudicatory process. Sovereign functions for the purpose of Arbitration Act would extend to exercise of executive power in different fields including commerce and economic, legislation in all forms, taxation, eminent domain and police powers which includes maintenance of law and order, internal security, grant of pardon etc., as 24 Prof. Stavros Brekoulakis – ‘On Arbitrability: Persisting Misconceptions and New Areas of Concern’ 25 Ajar Raib – Defining Contours of the Public Policy Exception – A New Test for Arbitrability H

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A distinguished from commercial activities, economic adventures and welfare activities.26 Similarly, decisions and adjudicatory functions of the State that have public interest element like the legitimacy of marriage, citizenship, winding up of companies, grant of patents, etc. are non- arbitrable, unless the statute in relation to a regulatory or adjudicatory mechanism either expressly or by clear implication permits arbitration. B In these matters the State enjoys monopoly in dispute resolution.

33Copy pinpoint33. Fourth principle of non-arbitrability is alluded to in the Order of Reference, which makes specific reference to Vimal Kishor Shah, which decision quotes from Dhulabhai, a case which dealt with exclusion of jurisdiction of civil courts under Section 9 of the Civil Procedure Code. C The second condition in Dhulabhai reads as under: “32. (2) Where there is an express bar of the jurisdiction of the court, an examination of the scheme of the particular Act to find the adequacy or the sufficiency of the remedies provided may be relevant but is not decisive to sustain the jurisdiction of the civil court. Where there is no express exclusion the examination of the remedies and the scheme of the particular Act to find out the intendment becomes necessary and the result of the inquiry may be decisive. In the latter case, it is necessary to see if the statute creates a special right or a liability and provides for the determination of the right or liability and further lays down that all questions about the said right and liability shall be determined by the tribunals so constituted, and whether remedies normally associated with actions in civil courts are prescribed by the said statute or not.” The order of reference notes that Dhulabhai refers to three categories mentioned in Wolverhampton New Waterworks Co. v. Hawkesford,27 to the following effect: “There are three classes of cases in which a liability may be established founded upon a statute. One is, where there was a liability existing at common law, and that liability is affirmed by a statute which gives a special and peculiar form of remedy different 26 Common Cause v. Union of India, (1999) 6 SCC 667 and Agricultural Produce Market Committee v. Ashok Harikuni & Another, (2000) 8 SCC 61. 27 H 9 [1859] 6 C.B. (NS) 336

VIDYA DROLIA AND OTHERS v. 1065 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

from the remedy which existed at common law; there, unless the statute contains words which expressly or by necessary implication exclude the common law remedy, and the party suing has his election to pursue either that or the statutory remedy. The second class of cases is, where the statute gives the right to sue merely, but provides no particular form of remedy: there, the party can only proceed by action at common law. But there is a third class, viz. where a liability not existing at common law is created by a statute which at the same time gives a special and particular remedy for enforcing it.” Dhulabhai’s case is not directly applicable as it relates to exclusion of jurisdiction of civil courts, albeit we respectfully agree with the Order C of Reference that the condition No.2 is apposite while examining the question of non-arbitrability. Implied legislative intention to exclude arbitration can be seen if it appears that the statute creates a special right or a liability and provides for determination of the right and liability to be dealt with by the specified courts or the tribunals specially constituted in that behalf and further lays down that all questions about the said right and liability shall be determined by the court or tribunals so empowered and vested with exclusive jurisdiction. Therefore, mere creation of a specific forum as a substitute for civil court or specifying the civil court, may not be enough to accept the inference of implicit non- arbitrability. Conferment of jurisdiction on a specific court or creation of a public forum though eminently significant, may not be the decisive test to answer and decide whether arbitrability is impliedly barred.

34Copy pinpoint34. Implicit non-arbitrability is established when by mandatory law the parties are quintessentially barred from contracting out and waiving the adjudication by the designated court or the specified public forum. F There is no choice. The person who insists on the remedy must seek his remedy before the forum stated in the statute and before no other forum. In Transcore v. Union of India and Another,28 this Court had examined the doctrine of election in the context whether an order under proviso to Section 19(1) of the Recovery of Debts Due to Banks and Financial G Institutions Act,1993 (the ‘DRT Act’) is a condition precedent to taking recourse to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the ‘NPA Act’). For analysing the scope and remedies under the two Acts, it was held that 28 (2008) 1 SCC 125 H

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A NPA Act is an additional remedy which is not inconsistent with the DRT Act, and reference was made to the doctrine of election in the following terms: “64. In the light of the above discussion, we now examine the doctrine of election. There are three elements of election, namely, existence of two or more remedies; inconsistencies between such remedies and a choice of one of them. If anyone of the three elements is not there, the doctrine will not apply. According to American Jurisprudence, 2d, Vol. 25, p. 652, if in truth there is only one remedy, then the doctrine of election does not apply. In the present case, as stated above, the NPA Act is an additional remedy to the DRT Act. Together they constitute one remedy and, therefore, the doctrine of election does not apply. Even according to Snell’s Principles of Equity (31st Edn., p. 119), the doctrine of election of remedies is applicable only when there are two or more co-existent remedies available to the litigants at the time of election which are repugnant and inconsistent. In any event, there is no repugnancy nor inconsistency between the two remedies, therefore, the doctrine of election has no application.” Doctrine of election to select arbitration as a dispute resolution mechanism by mutual agreement is available only if the law accepts existence of arbitration as an alternative remedy and freedom to choose is available. There should not be any inconsistency or repugnancy between the provisions of the mandatory law and arbitration as an alternative. Conversely and in a given case when there is repugnancy and inconsistency, the right of choice and election to arbitrate is denied. This requires examining the “text of the statute, the legislative history, and F ‘inherent conflict’ between arbitration and the statute’s underlying purpose”29 with reference to the nature and type of special rights conferred and power and authority given to the courts or public forum to effectuate and enforce these rights and the orders passed. When arbitration cannot enforce and apply such rights or the award cannot be G implemented and enforced in the manner as provided and mandated by law, the right of election to choose arbitration in preference to the courts or public forum is either completely denied or could be curtailed. In essence, it is necessary to examine if the statute creates a special right or liability and provides for the determination of each right or liability by 29 H Jennifer L. Peresie, Reducing the Presumption of Arbitrability.

VIDYA DROLIA AND OTHERS v. 1067 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

the specified court or the public forum so constituted, and whether the A remedies beyond the ordinary domain of the civil courts are prescribed. When the answer is affirmative, arbitration in the absence of special reason is contraindicated. The dispute is non- arbitrable.

35Copy pinpoint35. In M.D. Frozen Foods Exports Private Limited and Others v. Hero Fincorp Limited,30 and following this judgment in B Indiabulls Housing Finance Limited v. Deccan Chronicle Holdings Limited and Others,31 it has been held that even prior arbitration proceedings are not a bar to proceedings under the NPA Act. The NPA Act sets out an expeditious, procedural methodology enabling the financial institutions to take possession and sell secured properties for non-payment of the dues. Such powers, it is obvious, cannot be exercised through the arbitral proceedings.

36Copy pinpoint36. In Transcore, on the powers of the Debt Recovery Tribunal (DRT) under the DRT Act, it was observed: “18. On analysing the above provisions of the DRT Act, we find that the said Act is a complete code by itself as far as recovery of debt is concerned. It provides for various modes of recovery. It incorporates even the provisions of the Second and Third Schedules to the Income Tax Act, 1961. Therefore, the debt due under the recovery certificate can be recovered in various ways. The remedies mentioned therein are complementary to each other. E The DRT Act provides for adjudication. It provides for adjudication of disputes as far as the debt due is concerned. It covers secured as well as unsecured debts. However, it does not rule out the applicability of the provisions of the TP Act, in particular, Sections 69 and 69-A of that Act. Further, in cases where the debt is secured by a pledge of shares or immovable properties, with the passage of time and delay in the DRT proceedings, the value of the pledged assets or mortgaged properties invariably falls. On account of inflation, the value of the assets in the hands of the bank/FI invariably depletes which, in turn, leads to asset-liability mismatch. These contingencies are not taken care of by the DRT Act and, therefore, Parliament had to enact the NPA Act, 2002.” Consistent with the above, observations in Transcore on the power 30 (2017) 16 SCC 741 31 (2018) 14 SCC 783 H

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A of the DRT conferred by the DRT Act and the principle enunciated in the present judgment, we must overrule the judgment of the Full Bench of the Delhi High Court in HDFC Bank Ltd. v. Satpal Singh Bakshi,32 which holds that matters covered under the DRT Act are arbitrable. It is necessary to overrule this decision and clarify the legal position as the decision in HDFC Bank Ltd. has been referred to in M.D. Frozen B Foods Exports Private Limited, but not examined in light of the legal principles relating to non-arbitrability. Decision in HDFC Bank Ltd. holds that only actions in rem are non-arbitrable, which as elucidated above is the correct legal position. However, non-arbitrability may arise in case the implicit prohibition in the statute, conferring and creating special rights to be adjudicated by the courts/public fora, which right including enforcement of order/provisions cannot be enforced and applied in case of arbitration. To hold that the claims of banks and financial institutions covered under the DRT Act are arbitrable would deprive and deny these institutions of the specific rights including the modes of recovery specified in the DRT Act. Therefore, the claims covered by the DRT Act are non-arbitrable as there is a prohibition against waiver of jurisdiction of the DRT by necessary implication. The legislation has overwritten the contractual right to arbitration.

37Copy pinpoint37. In Natraj Studios (P) Ltd., a case under the Arbitration Act,1940, it was observed that on broader consideration of public policy the disputes were non-arbitrable. In N. Radhakrishnan v. Maestro Engineers and Others, 33 reliance was placed on the following observations in Abdul Kadir Samshuddin Bubere v. Madhav Prabharkar Oak and Another:34 “There is no doubt that when a serious allegation of fraud is laid against the party and the party who charged with the fraud desires that the matter should be tried in the open court it would be sufficient cause for the court for the court not to order an arbitration agreement to be filed and not to make the reference.” N. Radhakrishnan upheld the order rejecting the application under Section 8 of the Arbitration Act on the ground that it would be in furtherance of justice that the allegations as to fraud and manipulation of finances in the partnership firm are tried in the court of law which is 32 2013 (134) DRJ 566 (FB) 33 (2010) 1 SCC 72 34 H AIR 1962 SC 406

VIDYA DROLIA AND OTHERS v. 1069 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

more competent and has means to decide a complicated matter. However, A in A. Ayyasamy, notwithstanding the allegations of fraud, the civil appeal was allowed, the civil suit was stayed and reference to arbitration under Section 8 of the Arbitration Act was made. A.K. Sikri J. held that the Arbitration Act does not make any specific provision for excluding any category of disputes terming them as non-arbitrable but there are a number B of pronouncements which hold that fraud is one such category where the dispute would be considered as non-arbitrable. Elucidating on the exclusion, he observed that pleading of a mere allegation of fraud by one party is not enough. The allegation of fraud should be such which makes a virtual case of a criminal offence. On the question of non-arbitrability when there are allegations of fraud, he observed: C “25... finds that there are very serious allegations of fraud which make a virtual case of criminal offense or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by the civil court on the appreciation of the voluminous evidence that needs to be produced, the court can sidetrack the agreement by dismissing the application under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself...Such categories of non-arbitrable subjects are carved out by the courts, keeping in mind the principle of common law that certain disputes which are of public nature, etc. are not capable of adjudication and settlement by arbitration and for resolution of such disputes, courts i.e. public fora, are better suited than a private forum of arbitration...” D.Y. Chandrachud, J. in his concurring judgment unclasped the mandatory nature of Section 8 of the Arbitration Act to observe that allegations of fraud can be made a subject matter of arbitration by relying on Russell on Arbitration, Redfer Hunter on International Arbitration and Gary B. Born in International Commercial Arbitration. Reliance was placed on the principle of separation and legal effect of the doctrine of competence- competence, to observe: H

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A “13. Once an application in due compliance with Section 8 of the Arbitration Act is filed, the approach of the civil court should be not to see whether the court has jurisdiction. It should be to see whether its jurisdiction has been ousted. There is a lot of difference between the two approaches. Once it is brought to the notice of the court that its jurisdiction has been taken away in terms of the procedure prescribed under a special statute, the civil court should first see whether there is ouster of jurisdiction in terms or compliance with the procedure under the special statute. The general law should yield to the special law — generalia specialibus non derogant. In such a situation, the approach shall not be to see whether there is still jurisdiction in the civil court under the general law. Such approaches would only delay the resolution of disputes and complicate the redressal of grievance and of course unnecessarily increase the pendency in the court.” xx xx xx

D 43. Hence, the allegations of criminal wrongdoing or of statutory violation would not detract from the jurisdiction of the Arbitral Tribunal to resolve a dispute arising out of a civil or contractual relationship on the basis of the jurisdiction conferred by the arbitration agreement.” E Elucidating and summarising the legal position, D.Y.Chandrachud J. has observed: “53. The Arbitration and Conciliation Act, 1996, should in my view be interpreted so as to bring in line the principles underlying its interpretation in a manner that is consistent with prevailing approaches in the common law world. Jurisprudence in India must evolve towards strengthening the institutional efficacy of arbitration. Deference to a forum chosen by parties as a complete remedy for resolving all their claims is but part of that evolution. Minimising the intervention of courts is again a recognition of the same principle.”

38Copy pinpoint38. Arbitrability as noticed above in essence is a matter of national policy.35 A statute, on the basis of public policy, can expressly or by

35 A Second Look at Arbitrability: Approaches to Arbitration in the United States, H Switzerland and Germany by Patrick M. Baron and Stefan Liniger

VIDYA DROLIA AND OTHERS v. 1071 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

implication restrict or prohibit arbitrability of disputes. To this extent there is uniformity and consensus. However, N. Radhakrishnan while accepting that the dispute may be arbitrable under the applicable mandatory law, holds that the dispute would be non-arbitrable on public policy consideration if it relates to serious allegations of fraud. The two views in A. Ayyasamy exposit the predicament on the role of public policy in deciding the question of law of non-arbitrability. Whether a subject matter or a dispute should be held as non-arbitrable on public policy is vexed and not free from difficulty as reflected in the strong opinions expressed in the judgments. Indeed, under the Arbitration Act, 1940, the case law in view of the statutory discretion under sub- section (4) to Sections 20 and 34 clearly supports and accepts the role and relevance of public policy. Legal position under the Arbitration Act as examined under the heading ‘Who decides non- arbitrability’, however, is different.

39Copy pinpoint39. We begin by examining sub-clauses (i) and (ii) of clause (b) to Sub-section (2) to Section 34, which read as under: D “34. Application for setting aside arbitral award. – xx xx xx (2) An arbitral award may be set aside by the Court only if – (a) ... E (b) the Court finds that–– (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in fore, or (ii) the arbitral award is in conflict with the public policy of F India. Explanation 1. - For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if, –– (i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or G

(ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice. H

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A Explanation 2. - For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.” Section 34(2)(b) consists of two sub-clauses both accrediting the court with the power to set aside an award. Under sub-clause (i) an B award is liable to be set aside when the subject matter is not capable of settlement by arbitration under law for the time being in force. Under sub-clause (ii) an award can be set aside if it is in conflict with the public policy of India. As per Explanation No. 1, an award is in conflict with the public policy of India only if it was induced or affected by fraud, corruption, etc. or it is in contravention with the fundamental policy of C Indian law or is in conflict with the most basic notions of morality or justice. Explanation 2 cautions the courts not to review on the merits of the case while examining the question whether an award is in contravention with the fundamental policy of law. Therefore, conflict with the public policy of India and a subject matter of dispute not capable of settlement by arbitration, are two separate and independent grounds on which the court can set aside the award. Reference to public policy in Booz Allen & Hamilton Inc. and in the present matter and non- arbitrability of the subject matter is completely different and has nothing in common with the public policy of India referred to in sub-clause (ii) of Section 34(2)(b) of the Arbitration Act. Public policy in the context of non-arbitrability refers to public policy as reflected in the enactment, that is, whether the enactment confers exclusive jurisdiction to the specified court or the special forum and prohibits recourse to arbitration. Public policy in the context of sub-clause(ii) to Section 34(2)(b) refers to the public policy of the enactment, defining and fixing rights and obligations, and application of those rights and obligations by the arbitrator. Statutes unfailingly have a public purpose or policy which is the basis and purpose behind the legislation. Application of mandatory law to the merits of the case do not imply that the right to arbitrate is taken away. Mandatory law may require a particular substantive rule to be applied, but this would not preclude arbitration. Implied non-arbitrability requires prohibition against waiver of jurisdiction, which happens when a statute gives special rights or obligations and creates or stipulates an exclusive forum for adjudication and enforcement. An arbitrator, like the court, is equally bound by the public policy behind the statute while examining the claim on merits. The public policy in case of non-arbitrability would relate to conferment of exclusive jurisdiction on the court or the special forum set

VIDYA DROLIA AND OTHERS v. 1073 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

up by law for decision making. Non-arbitrability question cannot be answered by examining whether the statute has a public policy objective which invariably every statue would have. There is a general presumption in favour of arbitrability, which is not excluded simply because the dispute is permeated by applicability of mandatory law. Violation of public policy by the arbitrator could well result in setting aside the award on the ground of failure to follow the fundamental policy of law in India, but not on the ground that the subject matter of the dispute was non-arbitrable.

40Copy pinpoint40. However, the above discussion would not be a complete answer to N. Radhakrishnan that if justice demands, then notwithstanding the arbitration clause, the dispute would be tried in the open court. To accept this reasoning one would have to agree that arbitration is a flawed and compromised dispute resolution mechanism that can be forgone when public interest or public policy demands the dispute should be tried and decided in the court of law. The public policy argument proceeds on the foundation and principle that arbitration is inferior to court adjudication as: (i) fact finding process in arbitration is not equivalent to judicial fact finding, which is far more comprehensive and in-depth; (ii) there is limited or lack of reasoning in awards; (iii) arbitrators enjoy and exercise extensive and unhindered powers and therefore are prone in making arbitrary and despotic decisions; (iv) there is no appeal process in arbitration which combined with the (iii) above and limited review of an arbitral award in post-award court proceedings, arbitration may have devastating consequences for the losing party and undermines justice; (v) arbitration proceedings are usually private and confidential; (vi) arbitrators are unfit to address issues arising out of the economic power disparity or social concerns;36 (vii) business and industry, by adopting and compulsorily applying arbitration process, leave the vulnerable and weaker sections with little or no meaningful choice but to accept arbitration. A few people realize and understand the importance of loss of their right to access the court of law or public forum, which are impartial, just and fair;37 and (viii) arbitration is expensive and costly in comparison to court adjudication.38 G 36 (i) to (vi) from Prof. Stavros Brekoulakis – On Arbitrability: Persisting Misconceptions and New Area of Concern. 37 (vii) from the preamble of the text of the bill of 2007 Arbitration Fairness Act as was written by the sponsor and submitted to the House for consideration 38 Union of India v. Singh Builders Syndicate, (2009) 4 SCC 523. H

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41Copy pinpoint41. While it would not be correct to dispel the grounds as mere conjectures and baseless, it would be grossly irrational and completely wrong to mistrust and treat arbitration as flawed and inferior adjudication procedure unfit to deal with the public policy aspects of a legislation. Arbitrators, like the courts, are equally bound to resolve and decide disputes in accordance with the public policy of the law. Possibility of B failure to abide by public policy consideration in a legislation, which otherwise does not expressly or by necessary implication exclude arbitration, cannot form the basis to overwrite and nullify the arbitration agreement. This would be contrary to and defeat the legislative intent reflected in the public policy objective behind the Arbitration Act. C Arbitration has considerable advantages as it gives freedom to the parties to choose an arbitrator of their choice, and it is informal, flexible and quick. Simplicity, informality and expedition are hallmarks of arbitration. Arbitrators are required to be impartial and independent, adhere to natural justice, and follow a fair and just procedure. Arbitrators are normally experts in the subject and perform their tasks by referring to facts, D evidence, and relevant case law. Complexity is not sufficient to ward off arbitration. In terms of the mandate of Section 89 of the Civil Procedure Code and the object and purpose behind the Arbitration Act and the mandatory language of Sections 8 and 11, the mutually agreed arbitration clauses must be enforced. The language of Sections 8 and 11 of the E Arbitration Act are peremptory in nature. Arbitration Act has been enacted to promote arbitration as a transparent, fair, and just alternative to court adjudication. Public policy is to encourage and strengthen arbitration to resolve and settle economic, commercial and civil disputes. Amendments from time to time have addressed the issues and corrected the inadequacies and flaws in the arbitration procedure. It is for the stakeholders, including the arbitrators, to assure that the arbitration is as impartial, just, and fair as court adjudication. It is also the duty of the courts at the post-award stage to selectively yet effectively exercise the limited jurisdiction, within the four corners of Section 34(2)(b)(ii) read with Explanation 1 and 2 and check any conflict with the fundamental policy of the applicable law. We would subsequently refer to the ‘second look’39 principle which is applicable in three specific situations dealing with arbitrability as per the mandate of Section 34 of the Arbitration Act.

39 Mitsubishi Motors Corp v. Soler Chrysler Plymouth Inc, 473 U.S. 614 S Ct 3346 H (1985) (U.S. Supreme Court, 2 July 1985)

VIDYA DROLIA AND OTHERS v. 1075 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

42Copy pinpoint42. Recently, the Supreme Court of Canada in TELUS A Communications Inc. v. Avraham Wellman,40 while conceding that arbitration as a method of dispute resolution was met with “overt hostility” for a long time on public policy grounds as it ousts jurisdiction of courts, observed that the new legislation, the Arbitration Act of 1991, marks a departure as it encourages parties to adopt arbitration in commercial and other matters. By putting party autonomy on a high pedestal, the Act mandates that the parties to a valid arbitration agreement must abide by the consensual and agreed mode of dispute resolution. The courts must show due respect to arbitration agreements particularly in commercial settings by staying the court proceedings, unless the legislative language is to the contrary. The principle of party autonomy goes hand in hand with the principle of limited court intervention, this being the fundamental principle underlying modern arbitration law. Party autonomy is weaker in non-negotiated “take it or leave it” contracts and, therefore, the legislature can through statutes shield the weakest and vulnerable contracting parties like consumers. This is not so in negotiated agreements or even in adhesion contracts having an arbitration clause in commercial settings. Virtues of commercial and civil arbitration have been recognised and accepted and the courts even encourage the use of arbitration.

43Copy pinpoint43. A recent judgment of this Court in Avitel Post Studioz Limited and Others v. HSBC PI Holdings (Mauritius) Limited41 has examined the law on invocation of ‘fraud exception’ in great detail and holds that E N. Radhakrishnan as a precedent has no legs to stand on. We respectfully concur with the said view and also the observations made in paragraph 14 of the judgment in Avitel Post Studioz Limited, which quotes observations in Rashid Raza v. Sadaf Akhthar42: “4. The principles of law laid down in this appeal make a distinction between serious allegations of forgery/ fabrication in support of the plea of fraud as opposed to “simple allegations”. Two working tests laid down in para 25 are: (1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.” 40 (2019) SCC 19 (CanLII) 41 Civil Appeal No. 5145 of 2016 and connected matters, decided on 19.08.2020 42 (2019) 8 SCC 710 H

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A to observe in Avitel Post Studioz Limited: “it is clear that serious allegations of fraud arise only if either of the two tests laid down are satisfied and not otherwise. The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus, necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof but questions arising in the public law domain.” The judgment in Avitel Post Studioz Limited interprets Section 17 of the Contract Act to hold that Section 17 would apply if the contract itself is obtained by fraud or cheating. Thereby, a distinction is made between a contract obtained by fraud, and post- contract fraud and cheating. The latter would fall outside Section 17 of the Contract Act and, therefore, the remedy for damages would be available and not the remedy for treating the contract itself as void.

44Copy pinpoint44. In Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties43, legal proceedings for cancellation of documents under Section 31 of the Specific Relief Act, 1963 were held to be actions in personam and not actions in rem. Significantly, the judgment refers to the definition of action in rem by R.H. Graveson (Conflict of Laws 98, F 7th ed. 1974), which reads as under: “An action in rem is one in which the judgment of the Court determines the title to property and the rights of the parties, not merely as between themselves, but also as against all persons at any time dealing with them or with the property upon which the G Court had adjudicated.”

45Copy pinpoint45. In view of the above discussion, we would like to propound a four- fold test for determining when the subject matter of a dispute in an arbitration agreement is not arbitrable:

43 H Civil Appeal No. 5147 of 2016, decided on 19.08.2020

VIDYA DROLIA AND OTHERS v. 1077 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

(1) when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem. (2) when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable; (3) when cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and (4) when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s). These tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will help and assist in determining and ascertaining with great degree of certainty when as per law in India, a dispute or subject matter is non-arbitrable. D Only when the answer is affirmative that the subject matter of the dispute would be non-arbitrable. However, the aforesaid principles have to be applied with care and caution as observed in Olympus Superstructures Pvt. Ltd.: E “35...Reference is made there to certain disputes like criminal offences of a public nature, disputes arising out of illegal agreements and disputes relating to status, such as divorce, which cannot be referred to arbitration. It has, however, been held that if in respect of fats relating to a criminal matter, say, physical injury, if there is a right to damages for personal injury, then such F a dispute can be referred to arbitration (Keir v. Leeman). Similarly, it has been held that a husband and a wife may refer to arbitration the terms on which they shall separate, because they can make a valid agreement between themselves on that matter (Soilleux v. Herbst, Wilson v. Wilson and Cahill v. Cahill).” G

46Copy pinpoint46. Applying the above principles to determine non-arbitrability, it is apparent that insolvency or intracompany disputes have to be addressed by a centralized forum, be the court or a special forum, which would be more efficient and has complete jurisdiction to efficaciously and fully dispose of the entire matter. They are also actions in rem. Similarly, H

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A grant and issue of patents and registration of trademarks are exclusive matters falling within the sovereign or government functions and have erga omnes effect. Such grants confer monopoly rights. They are non- arbitrable. Criminal cases again are not arbitrable as they relate to sovereign functions of the State. Further, violations of criminal law are offenses against the State and not just against the victim. Matrimonial B disputes relating to the dissolution of marriage, restitution of conjugal rights etc. are not arbitrable as they fall within the ambit of sovereign functions and do not have any commercial and economic value. The decisions have erga omnes effect. Matters relating to probate, testamentary matter etc. are actions in rem and are a declaration to the world at large and hence are non-arbitrable.

47Copy pinpoint47. In view of the aforesaid discussions, we overrule the ratio in N. Radhakrishnan inter alia observing that allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non- arbitrability. We have also set aside the Full Bench decision of the Delhi High Court in the case of HDFC Bank Ltd. which holds that the disputes which are to be adjudicated by the DRT under the DRT Act are arbitrable. They are non-arbitrable.

48Copy pinpoint48. Landlord-tenant disputes governed by the Transfer of Property Act are arbitrable as they are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. Such actions normally would not affect third-party rights or have erga omnes affect or require centralized adjudication. An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court. F Landlord-tenant disputes do not relate to inalienable and sovereign functions of the State. The provisions of the Transfer of Property Act do not expressly or by necessary implication bar arbitration. Transfer of Property Act, like all other Acts, has a public purpose, that is, to regulate landlord- tenant relationships and the arbitrator would be bound by the provisions, including provisions which enure and protect the tenants.

49Copy pinpoint49. In view of the aforesaid, we overrule the ratio laid down in Himangni Enterprises and hold that landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration. However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or

VIDYA DROLIA AND OTHERS v. 1079 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

forum has been given exclusive jurisdiction to apply and decide special rights and obligations. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration. Who decides non-arbitrability?

50Copy pinpoint50. Lord Mustill’s well-known comparison of the relationship between courts and arbitrators to a relay race, reads: B

“Ideally, the handling of arbitrable disputes should resemble a relay race. In the initial stages, before the arbitrators are seized of the dispute, the baton is in the grasp of the court; for at that stage there is no other organisation which could take steps to prevent the arbitration agreement for being ineffectual. When the arbitrators take charge they take over the baton and retain it until they have made an award. At this point, having no longer a function to fill, the arbitrators hand back the baton so that the court can in case of need lend its coercive powers to the enforcement of the award.” Thus, the legal problem of allocation of decision-making authority between courts and arbitral tribunals.

51Copy pinpoint51. Issue of non-arbitrability can be raised at three stages. First, before the court on an application for reference under Section 11 or for stay of pending judicial proceedings and reference under Section 8 of the Arbitration Act; secondly, before the arbitral tribunal during the course of the arbitration proceedings; or thirdly, before the court at the stage of the challenge to the award or its enforcement. Therefore, the question – ‘Who decides non- arbitrability?’ and, in particular, the jurisdiction of the court at the first look stage, that is, the referral stage.

52Copy pinpoint52. Who decides the question of non-arbitrability? - a jurisdictional question is a technical legal issue, and requires clarity when applied to facts to avoid bootstrapping and confusion. The doubt as to who has the jurisdiction to decide could hinder, stray, and delay a many arbitration proceedings. Unfortunately, who decides non-arbitrability remains a vexed question that does not have a straightforward universal answer as would be apparent from opinions in the at-variance Indian case laws on this subject. To some extent, the answer depends on how much jurisdiction the enactment gives to the arbitrator to decide their own jurisdiction as well as the court’s jurisdiction at the reference stage and in the post-award proceedings. It also depends upon the jurisdiction bestowed by the enactment, viz. the facet of non-arbitrability in question, H

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A the scope of the arbitration agreement and authority conferred on the arbitrator.

53Copy pinpoint53. Under the Arbitration Act, 1940, the jurisdiction to settle and decide non-arbitrability issues relating to existence, validity, scope as well as whether the subject matter was capable of arbitration, with possible exception in case of termination, novation, frustration and ‘accord and satisfaction’ when contested on facts, was determined and decided at the first or at the reference stage by the courts. The principle being that the court should be satisfied about the existence of a valid arbitration agreement and that the disputes have arisen with regard to the subject matter of the arbitration agreement. At this stage, the court would be, however, not concerned with the merits or sustainability of the disputes. Despite best efforts to contain obstructive tactics, adjudication and final decision of non-arbitrability issues at the reference stage would invariably stop, derail and thwart the proceedings in the courts for years.

54Copy pinpoint54. The Arbitration Act based upon the UNCITRAL Model Law D introduced an entirely new regimen with the objective to promote arbitration in commercial and economic matters as an alternative dispute resolution mechanism that is fair, responsive and efficient to contemporary requirements. One of the primary objectives of the Arbitration Act is to reduce and minimize the supervisory role of courts. Accordingly, the statutory powers of the arbitral tribunal to deal with and decide jurisdictional issues of non-arbitrability were amplified and the principles of separation and competence- competence were incorporated, while the courts retained some power to have a ‘second look’ in the post- award challenge proceeding. On the jurisdiction of the court at the referral stage, views of this Court have differed and there have been statutory amendments to modify and obliterate the legal effect of the court decisions.

55Copy pinpoint55. The legal position as to who decides the question of non- arbitrability under the Arbitration Act can be divided into four phases. The first phase was from the enforcement of the Arbitration Act till the decision of the Constitution Bench of seven Judges in Patel Engineering G Ltd. on 26th October 2005. For nearly ten years, the ratio expressed in Konkan Railway Corpn. Ltd. and Others v. Mehul Construction Co.,44 affirmed by the Constitution Bench of five Judges in Konkan Railway Construction Ltd. and Another v. Rani Construction Pvt. Ltd.,45 had 44 (2000) 7 SCC 201 45 H (2002) 2 SCC 388

VIDYA DROLIA AND OTHERS v. 1081 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

prevailed. The second phase commenced with the decision in Patel A Engineering Ltd. till the legislative amendments, which were made to substantially reduce court interference and overrule the legal effect of Patel Engineering Ltd. vide Act 3 of 2016 with retrospective effect from 23rd October 2015. The third phase commenced with effect from 23rd October 2015 and continued till the enactment of Act 33 of 2019 B with effect from 9th August 2019, from where commenced the fourth phase, with a clear intent to promote institutionalized arbitration rather than ad hoc arbitration. The amendments introduced by Act 33 of 2019 have been partially implemented and enforced. In the present case, we are primarily concerned with the legal position in the third phase with effect from 23rd October 2015 when amendments by Act 3 of 2016 C became operative.

56Copy pinpoint56. We begin by reproducing the relevant statutory provisions, namely, Sections 8, 11, 16, sub-sections (1) and (2) to Section 34 including clause (b), which has been partly quoted in paragraph 39 above, and sub-sections (1), (2), (3) to Section 43 of the Arbitration Act. D For the sake of clarity and convenience, we are reproducing below the provisions of Sections 8 and 11 of the Arbitration Act in a tabulated form as Sections 8 and 11 were amended by Act 3 of 2016 with retrospective effect from 23rd October, 2015 and Section 11 has undergone another amendment vide Act 33 of 2019 with effect from 9th E August, 2019. Section 8, pre and post Act 3 of 2016, read as under:

SECTION 8 SECTION 8 (before Act 3 of 2016) (post Act 3 of 2016)

8. Power to refer parties to 8. Power to refer parties to arbitration where there arbitration where there is an is an arbitration agreement.— arbitration agreement. — (1) A judicial authority before (1) A judicial authority, before which an action is brought which an action is brought in a in a matter which is the subject of an arbitration matter which is the subject of an agreement shall, if a party to the arbitration agreement or arbitration agreement shall, if a any person claiming through or under him, so applies not party so applies not later than later than the date of submitting his first statement on the when submitting his first substance of the dispute, then, notwithstanding any statement on the substance of the judgment, decree or order of the Supreme Court or any dispute, refer the parties to court, refer the parties to arbitration unless it finds that arbitration. prima facie no valid arbitration agreement exists.

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A (2) The application referred to in (2) The application referred to in sub- section (1) shall not sub-section (1) shall not be be entertained unless it is accompanied by the original entertained unless it is arbitration agreement or a duly certified copy thereof. accompanied by the original [Provi ded that where the origi nal arbitration agreement or arbitration agreement or a duly a certified copy thereof is not available with the party certifi ed copy thereof. applyi ng for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by t he other party to that agreement, then, the party so applyi ng shall file such application along wit h a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce t he original arbitration agreement or its duly certified copy before that Court.] (3) Notwithstanding that an (3) Notwithstanding that an application has been made application has been made under under sub-section (1) and that the issue is pending before sub-section (1) and that the issue the judicial authority, an arbitration may be commenced is pending before the judicial or continued and an arbitral award made. authority, an arbitration may be commenced or continued and an arbitral award made.

xx xx xx Section 11, pre and post amendments vide Act 3 of 2016 and Act D 33 of 2019, reads as under: SECTION 11 SECTION 11 SECTION 11 (before Act 3 of (post Act 3 of 2016) (post Act 33 of 2019) 2016)

11. Appointment of 11. Appointment of 11. Appointment of arbitrators. – arbitrators. – arbitrators. — (1) A person of any (1) A person of any (1) A person of any nationality may be an nationality may be an nationality may be an arbitrator, unless otherwise arbitrator, unless otherwise arbitrator, unless otherwise agreed by the parties. agreed by the parties. agreed by the parties. (2) Subject to sub-section (2) Subject to sub-section (6), (2) Subject to sub-section (6), (6), the parties are free to agree on the parties are free to agree on the parties are free to agree a procedure for appointing the a procedure for appointing the on a procedure for arbitrator or arbitrators. arbitrator or arbitrators. appointing the arbitrator or arbitrators. (3) Failing any agreement (3) Failing any agreement (3) Failing any agreement referred to in sub-section referred to in sub-section (2), referred to in sub-section (2), (2), in an arbitration with in an arbitration with three in an arbitration with three three arbitrators, each arbitrations, each party shall arbitrators, each party shall party shall appoint one appoint one arbitrator, and the appoint one arbitrator, and the arbitrator, and the two appointed arbitrators shall two appointed arbitrators shall two appointed arbitrators appoint the third arbitrator appoint the third arbitrator shall who shall act as the presiding who shall act as the presiding appoint the third arbitrator arbitrator. arbitrator. who shall act as the (3-A) The Supreme Court and presiding arbitrator. the High Court shall have the power to designate, arbitral institutions, from time to time, which have been graded by the Council under Section 43- H I, for the purposes of this Act:

VIDYA DROLIA AND OTHERS v. 1083 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

Provided that in respect of those High Court jurisdict ions, where no graded arbitral institution are available, then, the Chief Justice of the concerned High Court may maintain a panel of arbitrators for discharging the functions and duties of arbitral institution and any reference to the arbitrator shall be deemed to be an arbitral institution for the purposes of this section and the arbitrator appointed by a party shall be entitled to such fee at the rate as specified in the Fourth C Schedule: Provided further that the Chief Justice of the concerned High Court may, from time to time , review the panel of arbitrators. (4) If the appointment (4) If the appointment (4) If [the appointment shall procedure in sub-section (3) procedure in sub-section (3) be made, on an application of applies and–– applies and –– the party, by the arbitral (a) a party fails to appoint an (a) a party fails to appoint an institution designated by the arbitrator within thirty days arbitrat or within thirty days Supreme Court, in case of from the receipt of a request from the receipt of a request international commercial to do so from the other party; to do so from the other party; arbitration, or by the High or or Court, in case of arbitrations (b) the two appointed (b) the two appointed other than int ernational arbitrators fail to agree on the arbitrat ors fail to agree on the commercial arbitration, as the third arbitrator within thirty third arbitrator within thirty case may be]. days from the date of their days from the date of their appointment, the appointment appointment, the appointment shall be made, upon request of shall be made, upon request of a party, by the Chief Justice or a party, by the Supreme Court any person or institution or, as the case may be, the designated by him. High Court or any person or institution designated by such F Court. (5) Failing any agreement (5) Failing any agreement (5) Failing any agreement referred to in sub-section (2), referred to in sub-section (2), referred to in sub-secti on (2), in an arbitration with a sole in an arbitration with a sol e in an arbitration wit h a sol e arbitrator, if the parties fail to arbitrat or, if the parties fail to arbitrator, if the parties fail to agree on the arbitrator within agree on the arbitrator within agree on the arbitrator within thirty days from receipt of a thirty days from receipt of a thirty days from receipt of a request by one party from the request by one party from the request by one party from the G other party t o so agree the other party to so agree the other party to so agree [the appointment shall be made, appointment shall be made, appointment shall be made on upon request of a party, by upon request of a party, by an application of the party in the Chi ef Justice or any the Supreme Court or, as the accordance with the provisions person or institution case may be, the High Court contained in sub- section (4)]. designated by him. or any person or institution desi gnated by such Court. H

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A (6) Where, under an (6) Where, under an (6) Where, under an appointment procedure appointment procedure appointment procedure agreed upon by the parties,–– agreed upon by the parties,–– agreed upon by the parties,— (a) a party fails to act as (a) a party fails to act as (a) a party fails to act as required under that required under thatrequired under that procedure; or procedure; or procedure; or (b) the parties, or the two (b) the parties, or the two (b) the parties, or the two B appointed arbitrators, fail to appointed arbitrators, fail to appointed arbitrators, fail to reach an agreement expected reach an agreement expected reach an agreement expected of them under that procedure; of them under that procedure; of them under that procedure; or or or (c) a person, including an (c) a person, including an (c) a person, including an institution, fails to perform institution, fails to perform institution, fails to perform any function entrusted to him any function entrusted to him any function entrusted to him or it under that procedure, a or it under that procedure, a or it under that procedure, a C party may request the Chief party may request the [the appointment shall be Justice or any person or Supreme Court or, as the case made, on an application of the institution designated by him may be, the High Court or any party, by the arbitral to take the necessary measure, person or institutioninstitution designated by the unless the agreement on the designated by such Court to Supreme Court, in case of appointment procedure take the necessary measure, international commercial provides other means for unless the agreement on the arbitration, or by the High D securing the appointment. appointment procedure Court, in case of arbitrations provides other means for other than international securing the appointment. commercial arbitration, as the case may be] to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment. (6-A) The Supreme Court or, (6-A) [* * *] as the case may be, the High Court, while considering any application under sub-section NA (4) or sub-section (5) or sub- section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement. (6-B) The designation of any (6-B) The designation of any person or institution by the person or institution by the G Supreme Court or, as the case Supreme Court or, as the case may be, the High Court, for may be, the High Court, for the NA the purposes of this section purposes of this section shall shall not be regarded as a not be regarded as a delegation delegation of judicial power of judicial power by the by the Supreme Court or the Supreme Court or the High High Court. court.] H

VIDYA DROLIA AND OTHERS v. 1085 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

(7) A decision on a matter (7) A decision on a matter (7) [* * *] A entrusted by sub-section (4) or entrusted by sub-section (4) or sub-section (5) or sub- section sub-section (5) or sub- section (6) to the Chief Justice or the (6) to the Supreme Court or, person or institution designated as the case may be, the High by him is final. Court or the person or institution designated by such Court is final and no appeal B including Letters Patent Appeal shall lie against such decision. (8) The Chief Justice or the (8) The Supreme Court or, as (8) [The arbitral institution person or institution the case may be, the High referred to in sub-sections (4), designated by him, in Court or the person or (5) and (6)], before appointing appointing an arbitrator, shall institution designated by such an arbitrator, shall seek a C have due regard to–– Court, before appointing an disclosure in writing from the (a) any qualifications required arbitrator, shall seek a prospective arbitrator in terms of the arbitrator by the disclosure in writing from the of sub-section (1) of Section agreement of the parties; and prospective arbitrator in terms 12, and have due regard to— (b) other considerations as of sub-section (1) of section (a) any qualifications required are likely to secure the 12, and have due regard to–– for the arbitrator by the appointment of any (a) any qualifications required agreement of the parties; and independent and impartial for the arbitrator by the (b) the contents of the arbitrator. agreement of the parties; and disclosure and other (b) the contents of the considerations as are likely to disclosure and other secure the appointment of an considerations as are likely to independent and impartial secure the appointment of an arbitrator.] independent and impartial arbitrator. (9) In the case of appointment (9) In the case of appointment (9) In the case of appointment of sole or third arbitrator in an of sole or third arbitrator in an of sole or third arbitrator in an international commercial international commercial international commercial arbitration, the Chief Justice of arbitration, the Supreme Court arbitration, [the arbitral India or the person or institution or the person or institution institution designated by the designated by him may appoint designated by that Court may Supreme Court] may appoint an arbitrator of a nationality appoint an arbitrator of a an arbitrator of a nationality other than the nationalities of nationality other than the other than the nationalities of the parties where the parties nationalities of the parties the parties where the parties belong to different nationalities. where the parties belong to belong to different different nationalities. nationalities. (10) The Chief Justice may (10) The Supreme Court or, as (10) [* * *] G make such scheme1 as he may the case may be, the High deem appropriate for dealing Court, may make such with matters entrusted by sun- scheme as the said Court may section (4) or sub- section (5) or deed appropriate for dealing sub-section (6) to him. with matters entrusted by sub- section (4) or sub- section (5) or sub-section (6), to it. H

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A (11) Where more than one (11) Where more than one (11) Where more than one request has been made under request has been made under request has been made under sub-section (4) or sub-section sub-section (4) or sub-section sub-section (4) or sub-section (5) or sub-section (6) to the (5) or sub-section (6) to 3 (5) or sub-section (6) to Chief Justices of different different High Courts or their different arbitral institutions, High Courts or their designates, the High Court or the arbitral institution to designates, the Chief Justice its designate to whom the which the request has been or his designate to whom the request has been first made first made under the relevant request has been first made under the relevant sub-section sub- section shall be under the relevant sub-section shall alone be competent to competent to appoint. shall alone be competent to decide on the request decide on the request. (12) (a) Where the matters (12) (a) Where the matters (12) Where the matter referred to in sub-sections (4), referred to in sub-sections (4), referred to in sub-sections (5), (6), (7), (8) and (10) arise (5), (6), (7), (8) and sub- (4), (5), (6) and (8) arise in an in an international section (10) arise in an international commercial commercial arbitration, the international commercial arbitration or any other reference to Chief Justice in arbitration, the reference to arbitration, the reference to those sub- sections shall be the Supreme Court or, as the the arbitral institution in construed as a reference to the case may be, the High Court those sub-sections shall be Chief Justice of India in those sub-sections shall be construed as a reference to (b) Where the matters referred construed as a reference to the the arbitral institution to in sub-sections (4), (5), (6), Supreme Court; and (b) where designated under sub-section D (7), (8) and (10) arise the matters referred to in sub- (3-A). in any other arbitration, the sections (4), (5), (6), reference to Chief Justice in (7), (8) and sub-section (10) those sub-sections shall be arise in any other arbitration, construed as a reference to the the reference to the Supreme Chief Justice of the High Court or, as the case may be, Court within whose local the High Court in those limits the principal Civil subsections shall be construed E Court referred to in clause (e) as a reference to the High of sub-section (1) of section 2 Court within whose local is situate and, where the High limits the principal Civil Court itself is the Court Court referred to in clause (e) referred to in that clause, to of sub-section (1) of section 2 the Chief Justice of that High is situate, and where the High Court. Court itself is the Court referred to in that clause, to F that High Court. (13) An application made (13) An application made under this section for under this section for appointment of an arbitrator appointment of an arbitrator or arbitrators shall be or arbitrators shall be disposed of by the Supreme disposed of by the arbitral Court or the High Court or the institution within a period of person or institution thirty days from the date of G NA designated by such Court, as service of notice on the the case may be, as opposite party. expeditiously as possible and an endeavour shall be made to dispose of the matter within a period of sixty days from the date of service of notice on the opposite party. H

VIDYA DROLIA AND OTHERS v. 1087 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

(14) For the purpose of (14) The arbitral institution determination of the fees of shall determine the fees of the arbitral tribunal and the the arbitral tribunal and the manner of its payment to the manner of its payment to the arbitral tribunal, the High arbitral tribunal subject to the Court may frame such rules as rates specified in the Fourth may be necessary, after taking Schedule. into consideration the rates specified in the Fourth Schedule. Explanation.–– For NA the removal of doubts, it is hereby clarified that this sub- section shall not apply to international commercial arbitration and in arbitrations C (other than international commercial arbitration) in case where parties have agreed for determination of fees as per the rules of an arbitral institution. xx xx xx D Section 16 of the Arbitration Act reads as under: “16. Competence of arbitral tribunal to rule on its jurisdiction.- (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that E purpose, - (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and F (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. (2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defense; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the G appointment of, an arbitrator. (3) A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. H

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A (4) The arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3), admit a later plea if it considers the delay justified. (5) The arbitral tribunal shall decide on a plea referred to in sub- section (2) or sub-section (3) and, where the arbitral tribunal takes B a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award. (6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with section 34. C xx xx xx Sub-sections (1) and (2) of Section 34 of the Arbitration Act read as under: “34. Application for setting aside arbitral award. - D (1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub- section (3). (2) An arbitral award may be set aside by the Court only if - (a) the party making the application establishes on the basis of the record of the arbitral tribunal that - (i) a party was under some incapacity, or (ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or (iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of H

VIDYA DROLIA AND OTHERS v. 1089 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or (v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or (b) the Court finds that - (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or C (ii) the arbitral award is in conflict with the public policy of India. Explanation 1 - For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,— (i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or D (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice. Explanation 2 - For the avoidance of doubt, the test as to whether E there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.” xx xx xx Sub-sections (1), (2) and (3) of Section 43 of the Arbitration Act reads as under: F “43. Limitations. – (1) The Limitation Act, 1963 (36 of 1963), shall apply to arbitrations as it applies to proceedings in Courts. (2) For the purposes of this section and the Limitation Act, 1963 (36 of 1963), an arbitration shall be deemed to have commenced G on the date referred in section 21. (3) Where an arbitration agreement to submit future disputes to arbitration provides that any claim to which the agreement applies shall be barred unless the agreement, and a dispute arises to which the agreement applies, the Court , if it is of opinion that in the H

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A circumstances of the case undue hardship would otherwise be caused, and notwithstanding that the time so fixed has expired, may on such terms, if any, as the justice of the case may require, extend the time for such period as it thinks proper.”

57Copy pinpoint57. In, Rani Construction Pvt. Ltd. the Constitution Bench B reiterated the earlier view expressed in Mehul Construction Co., that an order appointing an arbitrator under Section 11 of the Arbitration Act is an administrative order that did not mandate notice and hearing of the other party. Being an administrative order, the Chief Justice or his nominee do not decide any preliminary issue, or the issue of non-arbitrability, validity and existence of the arbitration agreement, which are to be decided by C the arbitrator at the first instance.

58Copy pinpoint58. However, a Constitution Bench of seven Judges vide majority judgment in Patel Engineering Ltd. overruled this ratio and held: “38… But the basic requirement for exercising his power under D Section 11(6), is the existence of an arbitration agreement in terms of Section 7 of the Act and the applicant before the Chief Justice being shown to be a party to such an agreement. It would also include the question of the existence of jurisdiction in him to entertain the request and an enquiry whether at least a part of the cause of action has arisen within the State concerned. Therefore, E a decision on jurisdiction and on the existence of the arbitration agreement and of the person making the request being a party to that agreement and the subsistence of an arbitrable dispute require to be decided and the decision on these aspects is a prelude to the Chief Justice considering whether the requirements of sub-section F (4), sub-section (5) or sub-section (6) of Section 11 are satisfied when approached with the request for appointment of an arbitrator......

39. It is necessary to define what exactly the Chief Justice, approached with an application under Section 11 of the Act, is to decide at that stage. Obviously, he has to decide his own jurisdiction in the sense whether the party making the motion has approached the right High Court. He has to decide whether there is an arbitration agreement, as defined in the Act and whether the person who has made the request before him, is a party to such an agreement. It is necessary to indicate that he can also decide the question whether the claim was a dead one; or a long-barred

VIDYA DROLIA AND OTHERS v. 1091 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

claim that was sought to be resurrected and whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations or by receiving the final payment without objection. It may not be possible at that stage, to decide whether a live claim made, is one which comes within the purview of the arbitration clause. It will be appropriate to leave that question to be decided by the Arbitral Tribunal on taking evidence, along with the merits of the claims involved in the arbitration. The Chief Justice has to decide whether the applicant has satisfied the conditions for appointing an arbitrator under Section 11(6) of the Act. For the purpose of taking a decision on these aspects, the Chief Justice can either proceed on the basis of affidavits and the documents produced or take such evidence or get such evidence recorded, as may be necessary. We think that adoption of this procedure in the context of the Act would best serve the purpose sought to be achieved by the Act of expediting the process of arbitration, without too many approaches to the court at various stages of the proceedings before the Arbitral Tribunal.” In Patel Engineering Ltd., the Court also held that Section 16 of the Arbitration Act makes explicit, what is otherwise implicit, that the arbitral tribunal has jurisdiction to rule on its own jurisdiction, including ruling on objections to existence or validity of the arbitration agreement, but this provision would apply when the parties have gone to the arbitral tribunal without recourse to Sections 8 or 11 of the Arbitration Act and not when the court at the reference stage has decided the jurisdictional issues. Decision of the court at the referral stage would be final and binding on the arbitral tribunal. Majority judgment also clarified that when an arbitral tribunal has been constituted by the parties without having taken recourse to a court order, the arbitral tribunal will have jurisdiction to decide all matters contemplated by Section 16 of the Arbitration Act.

59Copy pinpoint59. In National Insurance Company Limited v. Boghara Polyfab Private Limited,46 a two Judges’ Bench of this Court, elucidating on Patel Engineering Ltd., had identified and segregated the issues that arise for consideration in an application under Section 11 of the Arbitration Act into three categories, viz. (i) issues which the Chief Justice or his designate is bound to decide; (ii) issues which he can also decide, that is, issues which he may choose to decide or leave it to the arbitral 46 (2009) 1 SCC 267 H

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A tribunal to decide; and (iii) issues which should be left to the arbitral tribunal to decide, and thereafter had enumerated them as under: “22.1 The issues (first category) which the Chief Justice/his designate will have to decide are: (a) Whether the party making the application has approached B the appropriate High Court. (b) Whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement.

C 22.2 The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are: (a) Whether the claim is a dead (long-barred) claim or a live claim. D (b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection. 22.3 The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are: E (i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration). (ii) Merits or any claim involved in the arbitration.” F

23. It is clear from the scheme of the Act as explained by this Court in SBP & Co., that in regard to issues falling under the second category, if raised in any application under Section 11 of the Act, the Chief Justice/his designate may decide them, if necessary, by taking evidence. Alternatively, he may leave those G issues open with a direction to the Arbitral Tribunal to decide the same. If the Chief Justice or his designate chooses to examine the issue and decides it, the Arbitral Tribunal cannot re-examine the same issue. The Chief Justice/his designate will, in choosing whether he will decide such issue or leave it to the Arbitral Tribunal, H be guided by the object of the Act (that is expediting the arbitration

VIDYA DROLIA AND OTHERS v. 1093 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

process with minimum judicial intervention). Where allegations of forgery/fabrication are made in regard to the document recording discharge of contract by full and final settlement, it would be appropriate if the Chief Justice/his designate decides the issue.”

24. What is however clear is when a respondent contends that the dispute is not arbitrable on account of discharge of the contract under a settlement agreement or discharge voucher or no-claim certificate, and the claimant contends that it was obtained by fraud, coercion or undue influence, the issue will have to be decided either by the Chief Justice/his designate in the proceedings under Section 11 of the Act or by the Arbitral Tribunal as directed by the order under Section 11 of the Act. A claim for arbitration cannot be rejected merely or solely on the ground that a settlement agreement or discharge voucher had been executed by the claimant, if its validity is disputed by the claimant.”

60Copy pinpoint60. The issues included in the first category were: whether the party making the application had approached the appropriate High Court, D that is, the jurisdictional High Court; whether there is an arbitration agreement and whether the person who had applied under Section 11 is a party to such agreement. This would include the question whether the defendant or the opposite party is a party to the arbitration agreement or bound by the arbitration agreement in terms of Section 7 of the Arbitration E Act. With respect to the second category, the Court observed that the Chief Justice or his designate may decide the issue, if necessary, by taking evidence or in the alternative may leave the issues open with the direction to the arbitral tribunal to decide the same. Where the Chief Justice or his designate examines the issue and decides it, the arbitral tribunal cannot re-examine the issue. The Chief Justice or his designate would exercise this choice being guided by the object of the Arbitration Act, that is, expediting the arbitration process with minimum judicial intervention. Where dispute arises on account of settlement agreement, discharge voucher, no claim certificate amounting to discharge or accord and satisfaction, and the other side contends that such certificates were obtained by fraud, coercion or undue influence, the issue will have to be decided either by the Chief Justice or his designate in proceedings under Section 11 or by the arbitral tribunal as directed by the order under Section 11 of the Act. A claim for arbitration cannot be rejected merely or solely on the ground that the settlement agreement or discharge voucher had H

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A been executed if its validity is disputed. The third category would cover all other questions within the arbitration clause, which the court believed are within the exclusive jurisdiction of the arbitral tribunal at the first stage. This was explained by giving an example of a matter purportedly reserved for the final determination of the departmental authority or excepted or excluded matters. It would also include merits of any claim involved in arbitration.

61Copy pinpoint61. Paragraph 22 of Boghara Polyfab Private Limited, if read carefully, states that the factors to be considered while deciding an application under Sections 8 and 11 of the Arbitration Act would require an examination of whether there exists an arbitration agreement, that is, the agreement provides for arbitration proceedings in respect of disputes which have arisen between the parties to the agreement. The latter portion requires the court to apply its mind whether the disputes which have arisen can be settled by the arbitration agreement. The aforesaid observations, in our opinion, would be in conformity with the majority decision of the Constitution Bench in Patel Engineering Ltd. wherein it was observed that Sections 8 and 11 of the Arbitration Act are complimentary in nature and the Court, while exercising powers under the two Sections on whether the matter should be referred to arbitration, enjoys equal powers, otherwise, it would lead to an anomalous situation in that a judicial authority has wider power under Section 8 but lesser power of examination under Section 11.

62Copy pinpoint62. In Arasmeta Captive Power Company Private Limited and Another v. Lafarge India Private Limited,47 this Court had examined whether there is any conflict between Patel Engineering Ltd. and Boghara Polyfab Private Limited on the question of the scope of inquiry while deciding an application under Section 11(6) of the Arbitration Act. The Division Bench in Arasmeta Captive Power Co. Pvt. Ltd. had referred to paragraph 39 and sub-para (iv) of paragraph 47 in Patel Engineering Ltd., to observe: “18. On a careful reading of para 39 and Conclusion (iv), as set out in para 47 of SBP case [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] , it is limpid that for the purpose of setting into motion the arbitral procedure the Chief Justice or his designate is required to decide the issues, namely, (i) territorial jurisdiction, (ii)

47 H (2013) 15 SCC 414

VIDYA DROLIA AND OTHERS v. 1095 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

existence of an arbitration agreement between the parties, (iii) A existence or otherwise of a live claim, and (iv) existence of the conditions for exercise of power and further satisfaction as regards the qualification of the arbitrator. That apart, under certain circumstances the Chief Justice or his designate is also required to see whether a long- barred claim is sought to be restricted and B whether the parties had concluded the transaction by recording satisfaction of the mutual rights and obligations or by receiving the final payment without objection.” Thereafter, reference was made to the opinion expressed in judgment in Shree Ram Mills Ltd. v. Utility Premises (P) Ltd.,48 which it was contented had taken a different view from one in Boghara Polyfab C Private Limited. Disagreeing, the Court referred to the three Judge Bench decision in Chloro Controls India Private Limited which had considered the issue whether there was any variance between Shree Ram Mills Ltd. and Boghara Polyfab Private Limited, to hold that there was none and both the judgments are capable of being read in harmony to bring in line with the law declared in Patel Engineering Ltd. In particular, a reference was made to the following portion of the paragraph 27 of Shree Ram Mills Ltd. and paragraph 119 of Chloro Controls India Private Limited which read as under: “27. … If the Chief Justice does not, in the strict sense, decide the issue, in that event it is for him to locate such issue and record his satisfaction that such issue exists between the parties. It is only in that sense that the finding on a live issue is given. Even at the cost of repetition we must state that it is only for the purpose of finding out whether the arbitral procedure has to be started that the Chief Justice has to record satisfaction that there remains F a live issue in between the parties. The same thing is about the limitation which is always a mixed question of law and fact. The Chief Justice only has to record his satisfaction that prima facie the issue has not become dead by the lapse of time or that any party to the agreement has not slept over its rights beyond the G time permitted by law to agitate those issues covered by the agreement. It is for this reason that it was pointed out in the above paragraph that it would be appropriate sometimes to leave the question regarding the live claim to be decided by the Arbitral 48 (2007) 4 SCC 599 H

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A Tribunal. All that he has to do is to record his satisfaction that the parties have not closed their rights and the matter has not been barred by limitation. Thus, where the Chief Justice comes to a finding that there exists a live issue, then naturally this finding would include a finding that the respective claims of the parties have not become barred by limitation.” B xx xx xx “119. Thus, the Bench while explaining the judgment of this Court in SBP [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] has stated that the Chief Justice may not decide certain issues finally C and upon recording satisfaction that prima facie the issue has not become dead even leave it for the Arbitral Tribunal to decide.” In Arasmeta Captive Power Co. (P) Ltd., elucidating on the question whether the dispute was arbitrable within the scope of the arbitration clause should be decided by the Chief Justice/designate Judge D or by the arbitrator, this Court has observed: “... The stress laid thereon may be innovative but when the learned Judges themselves have culled out the ratio decidendi in para 39, it is extremely difficult to state that the principle stated in SBP [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] requires the E Chief Justice or his designate to decide the controversy when raised pertaining to arbitrability of the disputes. Or to express an opinion on excepted matters. Such an inference by syllogistic process is likely to usher in catastrophe in jurisprudence developed in this field. We are disposed to think so as it is not apposite to pick up a line from here and there from the judgment or to choose one observation from here or there for raising it to the status of “the ratio decidendi”. That is most likely to pave one on the path of danger and it is to be scrupulously avoided. The propositions set out in SBP, in our opinion, have been correctly understood by the two-Judge Bench in Boghara Polyfab (P) Ltd. and the same have been appositely approved by the three-Judge Bench in Chloro Controls India (P) Ltd. and we respectfully concur with the same. We find no substance in the submission that the said decisions require reconsideration, for certain observations made in SBP, were not noticed. We may hasten to add that the three-Judge Bench has been satisfied that the ratio decidendi of the judgment in SBP is really inhered in para 39 of the judgment.”

VIDYA DROLIA AND OTHERS v. 1097 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

63Copy pinpoint63. B.N. Srikrishna, J. in Shin-Etsu Chemical Co. Ltd. v. Aksh A Optifibre Ltd. and Another,49 a case relating to transnational arbitration under the New York Convention, had invoked the principle of ex visceribus actus for interpretation of the Arbitration Act. Sub-section (3) of Section 8 of the Arbitration Act envisages that even in a situation where an application to the court has been made in a pending proceeding, arbitration proceedings may commence and continue and even an award can be made. Section 16, it was held, incorporates the principles of separation and competence-competence thereby clearly indicating that the arbitrator can decide his or her own jurisdiction even when the validity of the main contract or the arbitration agreement is challenged. Section 34 states that the Court can go into three different aspects of arbitrability at the post-award stage. Therefore, the Arbitration Act itself envisages that the arbitral tribunal should rule on the questions of non- arbitrability subject to the second look of the court post the award. This helps in expeditious and quick disposal of matters before the court at the first stage while reserving the court’s power to examine the three facets of arbitrability at the third stage. This also prevents the possibility of a multiplicity of trials, an aspect highlighted in Sukanya Holdings (P) Ltd. On the ambit of the Court’s jurisdiction at the reference stage, it was observed that the correct approach to the review of the arbitration agreement would be restricted to prima facie finding that there exists an arbitration agreement that is not null and void, inoperative or incapable of being performed. The key rationale for holding that the courts’ review of the arbitration agreement should be limited to a prima facie standard is the principle of competence- competence. Further, were the courts are to be empowered to fully scrutinize the arbitration agreement an arbitral proceeding would have to be stayed until such time that the court seized of the matter renders a decision on the arbitration agreement. If the finding of the courts would be a final and determinative conclusion, then it is obvious that, until such a pronouncement is made, the arbitral proceedings would have to hang in abeyance. This evidently would defeat the credo and ethos of the Arbitration Act, which is to enable expeditious arbitration without avoidable intervention by the judicial authorities. As a G result, the approach to be adopted at the reference stage is whether it is ‘plainly arguable’ that the arbitration agreement is in existence. The judgment laid emphasis on the fact that the rule of priority in favour of the arbitrators is counter-balanced by the courts’ power to review the 49 (2005) 7 SCC 234 H

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A existence and validity of the arbitration agreement at the end of the arbitral process. It was elucidated: “Even if the court takes the view that the arbitral agreement is not vitiated or that it is not invalid, inoperative or unenforceable, based upon purely a prima facie view, nothing prevents the B arbitrator from trying the issue fully and rendering a final decision thereupon … Even after the court takes a prima facie view that the arbitration agreement is not vitiated on account of factors enumerated in Section 45, and the arbitrator upon a full trial holds that there is no vitiating factor in the arbitration agreement and makes an award, such an award can be challenged under Section C 48(1)(a). The award will be set aside if the party against whom it is invoked satisfies the court inter alia that the agreement was not valid under the law to which the parties had subjected it or under the law of the country where the award was made. The two basic requirements, namely, expedition at the pre- reference stage, and a fair opportunity to contest the award after full trial, would be fully satisfied by the interpreting Section 45 as enabling the court to act on a prima facie view. [T]he object of the Act would be defeated if the proceedings remain pending in the court even after commencing of the arbitration. It is precisely for this reason that I am inclined to the view that at the pre- reference stage contemplated by Section 45, the court is required to take only a prima facie view for making the reference, leaving the parties to a full trial either before the Arbitral Tribunal or before the court at the post-award stage.”

F D.M. Dharmadhikari, J. in his partly concurring opinion agreed with the view expressed by B.N. Srikrishna, J. on most of the above aspects with the following reservation: “112. Whether such a decision of the judicial authority or the court, of refusal to make a reference on grounds permissible under Section G 45 of the Act would be subjected to further re-examination before the Arbitral Tribunal or the court in which eventually the award comes up for enforcement in accordance with Section 48(1)(a) of the Act, is a legal question of sufficient complexity and in my considered opinion since that question does not directly arise on the facts of the present case, it should be left open for consideration H

VIDYA DROLIA AND OTHERS v. 1099 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

in an appropriate case where such a question is directly raised and decided by the court.” While Y.K.Sabharwal, J. (as His Lordship then was) dissented.

64Copy pinpoint64. We would now refer to decisions of this court post enforcement of Act 3 of 2016 with effect from 23rd October,2015. Reference Order observes that “one moot question that therefore arises, and which needs to be authoritatively decided by a Bench of three learned Judges, is whether the word ‘existence’ would include weeding-out arbitration clauses in agreements which indicate that the subject matter is incapable of arbitration”. Thereafter paragraph 59 from Duro Felguera S.A. as to the scope of Section 11(6-A) is quoted. C

65Copy pinpoint65. In Mayavati Trading Private Limited v. Pradyuat Deb Burman,50 a three Judge Bench has held that the legislature by inserting sub- section (6-A) to Section 11 and making amendments to Section 8 by Act 3 of 2016 has legislatively introduced a new regime so as to dilute and legislatively overrule the effect and ratio of the judgment of this D Court in Patel Engineering Ltd. Reliance was placed on paragraph 48 and 59 in Duro Felguera S.A. The concluding paragraph in Mayavati Trading Private Limited records: “10. This being the position, it is clear that the law prior to the 2015 Amendment that has been laid down by this Court, which would have included going into whether accord and satisfaction has taken place, has now been legislatively overruled. This being the position, it is difficult to agree with the reasoning contained in the aforesaid judgment, as Section 11(6- A) is confined to the examination of the existence of an arbitration agreement and is to be understood in the narrow sense as has been laid down in the judgment in Duro Felguera, SA.”

66Copy pinpoint66. Paragraph 48 and paragraph 59 of Duro Felguera, S.A. referred to above, read as under: “48...From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one aspect—the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple— 50 (2019) 8 SCC 714 H

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A it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement. xx xx xx

59. The scope of the power under Section 11(6) of the 1996 Act B was considerably wide in view of the decisions in SBP and Co. and Boghara Polyfab . This position continued till the amendment brought about in 2015. After the amendment, all that the courts need to see is whether an arbitration agreement exists— nothing more, nothing less. The legislative policy and purpose is essentially C to minimise the Court’s intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11(6-A) ought to be respected.”

67Copy pinpoint67. Dr. D.Y. Chandrachud, J. in A. Ayyasamy observed that Section 8 of the Arbitration Act has made a departure from Article 8 of D UNCITRAL Model Law as the former uses the expression ‘judicial authority’ rather than court and the words “unless it finds that the agreement is null and void, inoperative and incapable of being performed” mentioned in Article 8 do not find place in Section 8. Section 16 empowers the arbitral tribunal to rule upon its own jurisdiction, including the ruling with respect to the existence or validity of the arbitration agreement. E Further clause (b) to Section 16(1) stipulates that a decision by an arbitral tribunal that the main contract is void, will not entail ipso jure the invalidity of the arbitration clause. The arbitration agreement survives for determining whether the contract in which the arbitration clause is embodied is null and void, which would include voidability. The severability doctrine in arbitration is of crucial significance. Reference was made to the judgment of the U.K. Court of Appeal in Fiona Trust and Holding Corpn. v. Privalov,51 which judgment was affirmed by the House of Lords in Filli Shipping Co. Limited v. Premium Nafta Products Ltd.,52 to highlight that the arbitration clause should be liberally construed in favour of one-stop arbitration. Mere allegation that the agent had no authority to enter into the main contract is not necessarily an attack on the arbitration agreement. The principle of severability treats arbitration agreement as a distinct agreement that can be void or voidable only on the ground that relates to the arbitration agreement. Reference was also 51 (2007) 1 All ER (Comm) 891 : 2007 Bus LR 686 (CA) 52 H 2007 UKHL 40 : 2007 Bus LR 1719 (HL)

VIDYA DROLIA AND OTHERS v. 1101 DURGA TRADING CORPORATION [SANJIV KHANNA, J.]

made to the opinion of Scalia, J. of the Supreme Court of America in A Buckeye Check Cashing Inc. v. Cardegna53 that arbitration agreement is severable from the remainder of the contract and unless the challenge is to the arbitration clause itself, the issue of contract’s validity should be considered by the arbitrator in the first instance. In conclusion, it was observed: B “48. The basic principle which must guide judicial decision-making is that arbitration is essentially a voluntary assumption of an obligation by contracting parties to resolve their disputes through a private tribunal. The intent of the parties is expressed in the terms of their agreement. Where commercial entities and persons of business enter into such dealings, they do so with a knowledge C of the efficacy of the arbitral process. The commercial understanding is reflected in the terms of the agreement between the parties. The duty of the court is to impart to that commercial understanding a sense of business efficacy. xx xx xx D

53. The Arbitration and Conciliation Act, 1996, should in my view be interpreted so as to bring in line the principles underlying its interpretation in a manner that is consistent with prevailing approaches in the common law world. Jurisprudence in India must evolve towards strengthening the institutional efficacy of E arbitration. Deference to a forum chosen by parties as a complete remedy for resolving all their claims is but part of that evolution. Minimising the intervention of courts is again a recognition of the same principle.”

68Copy pinpoint68. In Garware Wall Ropes Limited v. Coastal Marine F Constructions and Engineering Limited,54 the question related to the effect of an arbitration clause contained in the master contract which was required to be stamped. The second part of Section 7(2) was applicable. The issue was whether the judge hearing the Section 11 application should impound the main contract and ensure that duty and G penalty, if any, are paid or in view of sub-section (6-A) to Section 11 this issue should be examined and decided by the arbitrator. The argument drawing distinction between validity and existence was raised before 53 163 L Ed 2d 1038 : 546 US 440 (2006) : 2006 SCC OnLine US SC 14 54 (2019) 9 SCC 209 H