ARBITRATION & ADR

ARBITRATION CONCILIATION & MEDITATION

NAME- Aryan Yadav

ENROLLMENT NO.A8111119082

COURSE-BA.LLB (H)

SECTION-B

SEMESTER-7th
Question Given
1. “The objective of the Arbitration and conciliation Act, 1996 is to provide speedier Justice.
For achieving this goal the provisions are provided to ensure non-interference by the court
during the proceedings under the Act.” Explain above statement in the light of the provisions
of the Arbitration and conciliation Act, 1996.

2. Define Arbitration. Discuss the arbitrability of the sub-matter which are being referred for
arbitration while referring latest case law

Answer 1
The Arbitration and Conciliation Act, 1996 (hereinafter the "1996 Act") supplants the
Arbitration Act, 1940. In the 1996 Act, intervention by Courts was limited so that the object
behind speedy justice could be well achieved. To further the aforesaid objective, the 1996 Act
harbours many provisions. Section 8 of the 1996 Act denotes one such provision which
provides for limited judicial intervention and furthers the objective by directing the parties to
get involved in arbitration on the basis of the arbitration agreement. In domestic arbitrations,
the uses of Section 8 applications in the Courts have spiralled over the years. This piece
provides an in depth analysis of Section 8 of the 1996 Act by focusing on the judicial precedents.

Section 8: The Golden Eagle:

A. Condition Precedent Stipulated under Section 8

Section 8 of the Arbitration and Conciliation Act, 1996 is peremptory in nature. It provides that
a judicial authority shall, on the basis of the arbitration agreement between the parties, direct
the parties to go for arbitration. It also enlists conditions precedent, which need fulfilment
before a reference can be made as per the terms of the 1996 Act.1 in P. Anand Gajapathi Raju
& Ors. v. P.V.G. Raju (Died) & Ors2., while iterating the periphery of Section 8 of the 1996
Act, the Supreme Court said that "The conditions which are required to be satisfied under Sub-
sections (1) and (2) of Section 8 before the Court can exercise its powers are (1) there is an
arbitration agreement; (2) a party to the agreement brings an action in the Court against the
other party; (3) subject matter of the action is the same as the subject matter of the arbitration
agreement; (4) the other party moves the Court for referring the parties to arbitration before it
submits his first statement on the substance of the dispute. .... The language of Section 8 is per-
emptor."

The following factors are to be considered before entertaining an application under Section 8
of the 1996 Act:

First question to be analyzed is whether it can be made applicable to a civil dispute. The
Supreme Court while answering the aforesaid question in H. Srinivas Pai and Anr. v. H.V. Pai
(D) thr. L.Rs. and Ors.3, said that "The Act applies to domestic arbitrations, international
commercial arbitrations and conciliations. The applicability of the Act does not depend upon
the dispute being a commercial dispute. Reference to arbitration and arbitability depends upon
the existence of an arbitration agreement, and not upon the question whether it is a civil dispute
or commercial dispute. There can be arbitration agreements in non-commercial civil disputes
also."

The presence of arbitration agreement is another pre-requisite for seeking a reference under
Section 8.4 Section 7 of the 1996 Act provides the diameter of the term "arbitration agreement".
The importance of arbitration agreement, for seeking a reference under Section 8, was
emphasized by the Supreme Court in Smt. Kalpana Kothari v. Smt. Sudha Yadav and ors.5
wherein the Court said that "As long as the Arbitration clause exists, having recourse to Civil
Court for adjudication of disputes envisaged to be resolved through arbitral process or getting
any orders of the nature from Civil Court for appointment of Receiver or prohibitory orders
without evincing any intention to have recourse to arbitration in terms of the agreement may
not arise."

Next question which might arise in the step wise analysis of Section 8 is whether the validity
of the arbitration clause can be disputed before the Court, in front of which an application for
reference is made. The answer to the question was laid in the negative by the Supreme Court
in Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums 6. The Court in this case
held that if the existence of the arbitration clause is admitted, in view of the mandatory language
of Section 8 of the Act, the courts ought to refer the dispute to arbitration. The Supreme Court,
while raising a presumption for the validity of an arbitration clause in an agreement, in India
Household and Healthcare Ltd. v. LG Household and Healthcare Ltd.7, said that the Courts
would construe the agreement in such a manner so as to uphold the arbitration agreement.

Section 8 further mandates that the subject matter of the dispute is the same as the subject
matter of the arbitration agreement. While articulating on this pre-requisite, the Supreme Court
in Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya and Anr.8, said that "The relevant language
used in Section 8 is-"in a matter which is the subject matter of an arbitration agreement”? Court
is required to refer the parties to arbitration. Therefore, the suit should be in respect of 'a matter'
which the parties have agreed to refer and which comes within the ambit of arbitration
agreement."

An application under Section 8(1) cannot be entertained unless accompanied by original

arbitration agreement or a certified copy thereof. Laying emphasis on section 8(2) for the grant
of reference, the Supreme Court in The Branch Manager, Magma Leasing and Finance Limited
and Anr. v. Potluri Madhavilata and Anr.9 said that "An analysis of Section 8 would show that
for its applicability, the following conditions must be satisfied: (e) that along with the
application the other party tenders the original arbitration agreement or duly certified copy
thereof."

B. Implied Inclusion under Section 8

Though not implicit in the reading of Section 8 of the Act, the Court in the case of Haryana
Telecom Ltd. v. Sterlite Industries (India) Ltd.10 brought in the competence of the arbitral
tribunal as one of the grounds for the grant of reference. The proposition that Section 8, despite
providing the explicit grounds on which reference can be made, also lays down the implicit
ground of competence of the Arbitral Tribunal, was also read in the affirmative by the Court in
the case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.11 wherein it was held that
where the cause/dispute is inarbitrable, the court where a suit is pending, will refuse to refer
the parties to arbitration, under Section 8 of the Act.

Effect of the Arbitration and Conciliation (Amendment) Ordinance, 2015:

On 23rd October, 2015, the President promulgated the Arbitration and Conciliation
(Amendment) Ordinance, 2015. The said Ordinance amended Section 8 by stipulating that
joinder of non-signatories to an arbitration agreement was not permissible. Further amendment
to Section 8 requires that the judicial authority compulsorily refer parties to arbitration
irrespective of any decision by the Supreme Court or any other court, if the judicial authority
finds that a valid arbitration clause prima-facie exists. The amendment essentially nullifies the
judgment of the Supreme Court in Booz Allen Hamilton v. SBI Home finance12, where it had
ruled that serious allegations of fraud are not arbitrable.

Section 8 of the 1996 Act denotes a provision which limits judicial intervention in the process
of arbitration. However, the judiciary has drawn exception to the extent of intervention on the
basis of the arbitrability of the subject matter and the competence of the arbitral tribunal to deal
with it. Though, the Amendment to Section 8 under the Arbitration and Conciliation
(Amendment) Ordinance, 2015 nullify the exceptions drawn by the Judiciary, however, the
effect of amendments are still to be seen. This said, Section 8 of the 1996 Act still acts as a
saving beacon for arbitration and forms the basis for forcing the parties in cases of domestic
arbitrations to adopt the model of arbitration where there exists an arbitration agreement.

Answer 2
Arbitration is considered as one of the most preferred modes of dispute resolution as it is
expedient, it values party autonomy and ensures party equality and these features are also the
pillars on which arbitration as a method of dispute resolution enjoys its standing.

Mr Fali S. Nariman in one of his lectures said “the development of arbitration in India is not
attributable to the success in arbitration, rather to the failures of the Court”.

The above-quoted statement quite vehemently and rightly expresses the development of the
law concerning arbitration in India. The Indian jurisprudence has seen a constant development
in its understanding and applicability of the concepts and principles of arbitration and the major
changes in its jurisprudence has to be attributed to the developing judicial understanding over
the same.

However, this method of dispute resolution suffers from various limitation and this article will
be dealing with the issue of arbitrability, which is one of the most important issues and
limitations of arbitration and it discusses whether the scope of the Arbitration Tribunal extends
to disputes of all nature or there exists disputes which the Tribunal is not capable of resolving
and have to be mandatorily tried in the courts.

Arbitrability
Arbitrability refers to determining which type of disputes may be resolved by arbitration and
what kind of disputes shall be exclusively dealt with by the courts. As per Article V(2)(a) of
the New York Convention, the arbitration award may be refused recognition or enforcement if
the subject-matter of the difference is not capable of settlement by arbitration under the law of
that country. Further, Article 36(1)(b) of the UNCITRAL Model Law, a court can refuse
enforcement if it finds that the subject-matter of the dispute is not capable of settlement under
the law of the State.

In Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., the Supreme Court while
propounding the three-prolonged test of determining arbitrability bifurcated the disputes into
dealing with rights in rem and right in personam and held that the latter were arbitrable whereas
the former was not arbitrable as they have the potential to affect the society at large. The Court
also listed out certain types of disputes which were not arbitrable and there has been an evolving
jurisprudence which has further added type of disputes to this list.

There are various categories of dispute like intellectual property rights, antitrust, insolvency,
criminal matters, fraud, etc. which are considered to be non-arbitrable. Fraud has been defined
as concealing or making false representation by way of a statement or conduct which results
into loss of the person relying on such representation.

Section 17 of the Contract Act, 1872 defines “fraud” to mean and include suggesting “a fact
knowing it to be untrue, knowingly active concealment of a fact, making a promise without
intending to fulfil it or any other act which is capable of deceiving and is committed by a party
to a contract, or with his participation, or by his agent, with intent to deceive another party
thereto or his agent, or to induce him to enter into the contract”.

The Evolving Jurisprudence

The following judicial decisions highlight the evolving jurisprudence over the concept of
arbitrability of fraud:

Russel v. Russel.—The issue of arbitrability of fraud for the first time arose in this case,
wherein it was held that if there exists prima facie evidence to support the existence of fraud
the court can refuse to refer the matter to arbitration.

Thereafter, the Supreme Court in Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak
held that cases involving serious allegations of fraud were to be decided by the court and it was
a valid ground for not referring the matter to arbitration.

The Supreme Court again in N. Radhakrishnan v. Maestro Engineers held that an issue of fraud
is not arbitrable as the case involved serious allegations of fraud and such dispute were to be
settled by the courts through detailed evidence led by both parties. In addition to this, the Court
also emphasised that the dispute would be non-arbitrable on public policy consideration if it
was related to serious allegations of fraud.

A. Ayyasamy v. A. Paramasivam. It was held that, cases where there exists serious allegation
of fraud are to be treated as non-arbitrable and such matters have to be dealt with only by the
civil courts. However in case, the allegations are in the nature of fraud simpliciter, such disputes
can be dealt by the Arbitral Tribunal. The Supreme Court further deliberated that issues in
which there exists serious allegation of forgery/fabrication of documents or where fraud is
capable of invalidating the entire contract or affects the validity of the arbitration clause will
be dealt only by the courts and the Arbitration Tribunal will not have jurisdiction to decide the
same.

The concept of “complex fraud” may be found in the opinion of Lord Hoffman, in Fiona Trust
& Holding Corpn. v. Privalov, where the Court dealt with the concept of “complex fraud” and
held that it refers to a scenario where the very foundation of an arbitration agreement is
challenged due to a fraudulent act.

Further in Rashid Raza v. Sadaf Akhtar, the Supreme Court formulated a two-step test to
determine what constitutes a complex fraud It held that firstly, it has to be seen that whether
the plea perrmeates the entire contract and specifically the arbitration agreement, thus rendering
it void and secondly, the courts have to see whether the allegations of fraud are related to the
internal affairs of the parties and have no implication in the public domain and such case it
would be arbitrable.

The Supreme Court in Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. observed
that a dispute becomes non-arbitrable only when the court comes to the conclusion that the
“serious allegations of fraud” which make arbitration agreement itself is inexistent and has
been vitiated by fraud; or in cases where the allegations are levelled against the State or its
instrumentalities, relating to arbitrary, fraudulent, or mala fide conduct, raising the question of
public law as opposed to questions limited to the contractual relationship between the parties
and rest all the allegations of fraud are arbitrable.

The Problematic Jurisprudence

The existing jurisprudence highlights the complexity with which the issue of arbitrability of
fraud has been dealt with and more importantly it has been overfilled with various test making
it more prone for judicial intervention. There exists no sound logic for differentiating between
fraud simpliciter and fraud complex as the arbitrators also has the power to seek assistance for
the recording of evidence under Section 27 of the Arbitration and Conciliation Act, 1996
(hereinafter referred to as “the Act”) and hence decide accordingly based on such evidence the
issue of fraud like the courts would ordinarily do.

The fact that this distinction is superfluous and impractical is evident by the fact that the
Supreme Court itself after suggesting this distinction in Ayyaswamy has suggested new and
complex factor to the same and thus making it unpredictable and wavering.

Even the Law Commission in its 246th Report proposed addition of sub-section (6) to Section
16 of the Act and empowering the Tribunal to pass an award even if there were allegations of
fraud which would still leave the parties with the option of raising the issue of arbitrability
before the arbitrator at the pre-award stage and thus adhering to the principle of Kompetenz-
Kompetenz and if rejected by the Tribunal, it would be available at the post-award stage as the
award can be challenged on the ground of conflicting with the public policy of India under
Section 34(2)(b)(ii) of the 1996 Act.

Further, the Supreme Court in World Sport Group (Mauritius) Ltd. v. MSM Satellite
(Singapore) Pte. Ltd. while dealing with a foreign seated arbitration held that every kind of
fraud is arbitrable, there exists no reasonable differentia for this different approach for foreign
and domestic arbitration.

Recently, the Supreme Court in Vidya Drolia v. Durga Trading Corpn. Held that allegations of
fraud are arbitrable when it relates to a civil dispute and exclude only those claims which
vitiates and render the arbitration clause invalid. The Court analysed the fact that arbitration is
a private dispute resolution mechanism which aims at securing just, fair and effective resolution
of disputes in an expedient manner. The Court focused on the distinction between matters
which deal with right in rem and right in personam.

Previously, in N Radhakrishnan case, the Supreme Court had held that a dispute would be non-
arbitrable on public policy constraints if it is related to serious allegations of fraud. However,
the Supreme Court in Vijay Drolia held that if the reasoning propounded in N. Radhakrishnan
has to be accepted, it would be similar to agreeing that the arbitration mechanism of the country
is flawed and compromised one which can be set aside on grounds that public policy or public
interest demands that such dispute should be decided in the court and it would be abrupt to
second this opinion. In addition to this, the Court also highlighted the fact that an arbitrator is
also an expert and decides a case on basis of facts, evidence and law. Further simplicity,
informality and expedition are hallmarks of arbitration. Also the principle of party autonomy
which finds its place in Sections 8 and 11 of the Act and also Section 89 of the Civil Procedure
Code, 1908 of respecting the autonomy of parties and their decision to arbitrate the matter by
simply referring the matter to arbitration and not try it themselves.

The Court further highlighted that the general rule and principle, given the legislative mandate
clear from Act 3 of 2016 and Act 33 of 2019, and the principle of severability and Kompetence
Kompetence, is that the Arbitral Tribunal is the preferred first authority to determine and decide
all questions of non-arbitrability. The Court has been conferred the power of “second look” on
aspects of the non-arbitrability post the award in terms of sub-clauses (i), (ii) or sub-clause (iv)
of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.

The Court propounded the fourfold test for determining the arbitrability of the subject-matter:

When the 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;

When the cause of action and subject matter of the dispute affects third-party rights; have erga
omnes effect; require centralised adjudication, and mutual adjudication would not be
appropriate and enforceable;

When the cause of action and subject-matter of the dispute relates to the inalienable sovereign
and public interest functions of the State and hence mutual adjudication would be
unenforceable; and
When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable
as per mandatory statute(s).

It held that only when the answer is affirmative, the subject-matter would be considered as non-
arbitrable and accordingly it overruled the ratio in N. Radhakrishnan judgment and held that
allegations of fraud can be arbitrable when it relates to a civil dispute. However, the only caveat
being that fraud which vitiates or rends the arbitration clause invalid would be non-arbitrable.
It further held that matters which are to be adjudicated by the Debts Recovery Tribunal under
the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 will not be arbitrable.

This recent judgment of the Supreme Court has cleared its stance over the issue of arbitrability
of disputes concerning serious allegation of fraud and its relation to the public policy of India
and is definitely a step towards the agenda of a pro-arbitration regime, however in the author’s
view the Supreme Court has left the matter half done by holding that “those frauds which vitiate
or renders the arbitration clause invalid would still be non-arbitrable”, as this still leaves the
scope for judicial intervention in arbitration matters where the courts can delve into the
question of validity of the arbitration clause and thus can still intervene in arbitration matters
which is against the basic principle of arbitration i.e. Kompetenz-Kompetenz.

In Henry Schein Inc. v. Archer and White Sales Co., the US Supreme Court held that the issue
of arbitrability must be decided by the arbitrator in all cases and not by the civil courts. It further
emphasised that even where any party pleads that the reference to arbitration is baseless or has
no grounds, even that plea should be decided by the arbitrator because of the principle of
Kompetenz-Kompetenz.

This approach adopted by the US Supreme Court is in consonance with the basic principles of
arbitration and hence acts as a benchmark towards establishing and functioning a pro-
arbitration regime and is a favourable approach than the one propounded by the Indian Supreme
Court. Thus it can be concluded that though the Indian jurisprudence on arbitraibility is moving
towards a pro-arbitration regime, it cannot be said to be settled notion and in full consonance
with the established principles of arbitration like Kompetenz-Kompetenz.