Powers of Arbitral Tribunal add or delete a “Party” under S. 16: An Analysis

Introduction

“It bids us to remember benefits rather than injuries, and benefits received rather than benefits conferred; to be patient when we are wronged; to settle a dispute by negotiation and not by force; to prefer arbitration to litigation — for an arbitrator goes by the equity of a case, a judge by the strict law, and arbitration was invented with the express purpose of securing full power for equity.”¹ As expressed by the great Greek philosopher, arbitration stems from the principle of equity and compromise but over the years it has become more complex leading to many judicial interference and scrutiny.

The purpose and purport of appointment of Arbitrator under Section 11² of the Arbitration and Conciliation Act, 1996³ was to show the flexibility and the morale of how the Arbitration Code was enacted. It provides parties the autonomy to decide on a procedure for appointment of arbitrator when the parties cannot come to a mutual decision in appointing an arbitrator or arbitrators and if mutual appointment of arbitration fails, an application under Section 11(6) of the Act can be availed by the either parties to take assistance from the court for the appointment of arbitrator or arbitrators.

Section 11(6) enlists three possible defects in the appointment procedure, namely: first, a party fails to act as required by the agreed procedure; second, the parties or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or third, a person, including an institution, fails to perform any function entrusted to them or under the agreed procedure.⁴

The appointment of arbitrator under Section 11(6) by the competent court since the enactment of the Act has undergone ample of judicial scrutiny and criticism, by way of many amendments and the precedents laid down from time to time, the true nature of the provision has been adequately settled.

The issue that has often arisen under Section 16⁵ of the Act is that — Whether the Arbitral Tribunal under Section 16 has its jurisdiction to add or delete a party when that party has already been added or deleted at the referral stage by the competent court under Section 11(6) of the Act.

Pre-amendment of 2015

The precedents laid down pre-amendment of 2015 gave the referral court ample of power to decide the appointment of arbitrator or arbitrators in depth. In Konkan Rly. Corpn. Ltd. v. Rani Construction (P) Ltd.⁶, a five-Judge Bench of the Supreme Court observed that the power exercised by the referral court under Section 11 of the Act is an administrative power and thus the Chief Justice or his designate do not have the power to decide any preliminary issue at the referral stage. This was later overruled in SBP & Co. v. Patel Engg. Ltd.⁷ wherein a seven-Judge Bench held that the appointment of arbitrator under Section 11(6) of the Act was not only an administrative power but also a judicial power as well. The Chief Justice or his designate had the power to decide all preliminary issues at the referral stage under Section 11(6) of the Act. The Supreme Court took such view on the premise that Section 16 of the Act, 1996, which empowers the Arbitral Tribunal to rule on its own jurisdiction, applies only when the parties go before the Tribunal without having taken recourse to Section 8 or Section 11 respectively of the Act, 1996 first.

Then in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.⁸, the Supreme Court examined the extent of judicial interference at the referral stage under Section 11(6) of the Act as laid down in Patel Engg.⁹ and elucidated three categories of issues which could arise before the referral court as follows:

22.1. (a) The issues (first category) which the Chief Justice/his designate will have to decide are: Whether the party making the application has approached the appropriate High Court, 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.

22.2. (b) 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: Whether the claim is a dead (long-barred) claim or a live claim. 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. (c) The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are: 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) and merits or any claim involved in the arbitration.¹⁰

Post-amendment of 2015

The decisions of the Supreme Court in Patel Engg.¹¹ and Boghara Polyfab¹² conferred the referral courts the discretion to conduct mini-trials and indulge in the appreciation of evidence on the issues concerned with the subject-matter of arbitration. This allowed for greater judicial interference at the pre-arbitral stage. The Law Commission of India in its 246th Law Report¹³ took note of the issue of delay of arbitration proceedings by significant judicial intervention especially during the referral stage under Section 11(6) of the Act and considered changes by way of amendment in 2015.¹⁴ The Arbitration and Conciliation (Amendment) Act, 2015 minimalised the judicial interference at the referral stage by incorporating Section 11(6-A)¹⁵ where the competent court at the referral stage was to confine to the examination of the existence of an arbitration agreement.¹⁶

Justice Kurian Joseph in Duro Felguera SA v. Gangavaram Port Ltd.¹⁷ held that:

59. The scope of the power under Section 11(6) of the 1996 Act was considerably wide in view of the decisions in SBP & Co.¹⁸ and Boghara Polyfab¹⁹. 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 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.

The above decision was affirmed in Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman²⁰, where it “confined to the examination of the existence of an arbitration agreement is to be understood in the narrow sense and the law point prior to the 2015 Amendment Act, as set forth by the decisions of this Court in Patel Engg.²¹ and Boghara Polyfab²², has been legislatively overruled.”

However, interestingly Section 11(6-A) was omitted vide the 2019 Amendment²³ but the omission was and still not yet notified.

The Supreme Court in Vidya Drolia v. Durga Trading Corpn.²⁴ presumed that the omission of Section 11(6-A) vide 2019 Amendment was made effective and held that the principle laid down in Patel Engg.²⁵ would become applicable post-omission. It also held that the exercise of power for interference by the referral court, only allows so in exception cases where ex facie meritless claims are sought to be referred to arbitration.

In BSNL v. Nortel Networks India (P) Ltd.²⁶ it was held that,

45.1. … at the referral stage the court can interfere “only” when it is “manifest” that the claims are ex facie time-barred and dead, or there is no subsisting dispute…. and knockdown ex facie meritless, frivolous, and dishonest litigation which would ensure expeditious and efficient disposal at the referral stage.

An eye of the needle test was crystallised in NTPC Ltd. v. SPML Infra Ltd.²⁷ where the Court at the referral stage should examine the existence and validity of an arbitration agreement and the non-availability of a dispute thoroughly.

However, the finding in Vidya Drolia²⁸ with respect to the power of the Referral Court post-amendment and post-omission of Section 11(6-A) was found erroneous by a seven-Judge Constitutional Bench in Interplay between Arbitration Agreements under Arbitration and Conciliation Act, 1996 and Stamp Act 1899, In re²⁹ wherein it was held that the omission of Section 11(6-A) has not yet been notified by the Central Government and therefore it was incumbent upon the Court to give true effect to the legislative intent and since Section 11(6-A) continues to remain in force, the referral court is not the appropriate forum to conduct a mini-trial by allowing the parties to adduce the evidence with regard to the existence or validity of an arbitration agreement and the courts at the referral stage should only confine to the determination of the arbitration agreement notwithstanding that even if a prima facie view as to the existence of an arbitration agreement is taken away by the referral court, it does not take away the kompetenz of the Arbitral Tribunal under Section 16 to examine the issue in dept.

Similarly, a five-Judge Constitutional Bench in Cox & Kings Ltd. v. SAP India (P) Ltd.³⁰ also while dealing with the scope of inquiry under Section 11 of the Act when it comes to impleading the non-signatories in the arbitration proceedings and whether the non-signatory party is a veritable party to the arbitration agreement laid down that the referral court should not delve into the complexities of the facts involved and should leave it for the Arbitral Tribunal to decide since the issue of determining parties to an arbitration agreement goes to the very root of the jurisdictional competence of the Arbitral Tribunal under Section 16 and it should be rightly done on the basis of the factual, legal and circumstantial aspects upholding the principles of natural justice.

Doctrine of kompetenz

The doctrine of “kompetenz-kompetenz” under Section 16 of the Act enshrines arbitral autonomy. It empowers the Arbitral Tribunal the authority to determine its enforceability independently from the national courts and limiting judicial intervention, to this extent even Section 5³¹ of the Act stipulates the minimal supervisory role that the courts should play in the arbitral process and should only intervene over matters expressly and strictly permitted in the Act. Gary B. Born³² describes arbitral autonomy as “the right of parties to resolve their disputes, with one another, in a manner of their own choosing” as “a basic aspect of individual autonomy and liberty, which is properly accorded protection in almost all developed legal systems”.

Recent ruling

Thus, after numerous trials, errors and rigorous detailed interpretations by way of judgment and precedents, the law with respect to the arbitral autonomy under Section 16 of the Act and the judicial authority at the referral stage under Section 11 has been perspicaciously distinguished by a seven-Judge constitutional judgment in Interplay³³ and on the same footing, the Supreme Court in a recent ruling in SBI General Insurance Co. Ltd. v. Krish Spg.³⁴ elucidated the domain of the referral court under Section 11 and that an application under Section 11(6-A) is preferred when either of the parties fail to appoint an arbitrator(s) and the court is empowered to prime facie “examine” the existence of an arbitration agreement in terms of Section 7³⁵ of the Act. The word “examine” has a very narrow scope in terms of Section 11(6-A) and is limited to the requirement of a formal validity. It opined that “The use of the term ‘examination’ under Section 11(6-A) as distinguished from the use of the term ‘rule’ under Section 16 implies that the scope of enquiry under Section 11(6-A) is limited to a prima facie scrutiny of the existence of the arbitration agreement, and does not include a contested or laborious enquiry, which is left for the Arbitral Tribunal to ‘rule’ under Section 16. The prima facie view on existence of the arbitration agreement taken by the referral court does not bind either the Arbitral Tribunal or the court enforcing the arbitral award.”

Conclusion

In the light of the pertinent observations made in Krish Spg.³⁶ and Interplay³⁷ after detailed explications and elucidations, has affirmed that the scope of judicial interference under Section 11(6-A) of the Act is only confined to the limited scrutiny of “prima facie existence of the arbitration agreement nothing more and nothing else” and the kompetenz of the Arbitral Tribunal under Section 16 confers complete arbitral autonomy to rule, determine and act on the issues pertaining to impleadment or deletion of a party, signatory or non-signatory, arbitrality or non-arbitrality, necessary or not necessary party, joinder or non-joinder to the arbitration in depth even if the ruling is contrary to that of the referral court under Section 11(6) of the Act.