“27. … While deciding an issue, the court is bound to give reasons for its conclusion. It is the duty and obligation on the part of the court to record reasons while disposing of the case. … The reason is the heartbeat of every conclusion. It introduces clarity in an order and without the same, the order becomes lifeless. Reasons substitute subjectivity with objectivity. The absence of reasons renders an order indefensible/unsustainable particularly when the order is subject to further challenge before a higher forum. Recording of reasons is the principle of natural justice and every judicial order must be supported by reasons recorded in writing. It ensures transparency and fairness in decision making. The person who is adversely affected must know why his application has been rejected.”
The above mentioned are the observations of the Supreme Court in Sant Lal Gupta v. Modern Coop. Group Housing Society Ltd.[1], wherein the Supreme Court, after relying on plethora of its previous cases, has made its observations on point of a reasoned/speaking order.
Sections 8[2] and 45[3] of the Arbitration and Conciliation Act, 1996 (hereafter, “A&C Act, 1996”) respectively envisage that if a “judicial authority”, which is dealing with a matter between the parties, is apprised by one of the party that the matter in dispute before it contains an arbitration agreement, then such “judicial authority” shall immediately refer the parties to arbitration, unless it prima facie finds that no valid arbitration agreement exists between the parties.[4] The only difference between Sections 8 and 45 of the A&C Act, 1996 is that the former applies in cases of “domestic arbitration”, while the latter applies in cases of “foreign commercial arbitration”.
The words “domestic arbitration” and “foreign commercial arbitration” are not defined under the A&C Act, 1996. A “domestic arbitration” can be said to be an arbitration, where the “seat of arbitration” is chosen as India; and a “foreign commercial arbitration” is the one whose “seat of arbitration” is outside India and also it shall deal only with commercial legal relationship between the parties. Hence, it is the “seat” or “place” of arbitration, which differentiates between the two, and not the “nature” of arbitration. Part 1 of the A&C Act, 1996 applies exclusively to the “domestic arbitration”,[5] while Part 2 applies exclusively to “foreign arbitration”, and Part 1 applies to both international arbitrations which take place in India as well as domestic arbitrations which would normally take place in India.[6]
What is a “judicial authority” is also not defined under the A&C Act, 1996. But, a 7-Judge Constitutional Bench of the Supreme Court in SBP & Co. v. Patel Engg. Ltd.,[7] has held that a “judicial authority” would include a court as defined under Section 2(e)[8] of the A&C Act, 1996, and would also include other courts and special tribunals. On the basis of above-mentioned ratio decidendi of the Supreme Court, we can say that all the courts, quasi-judicial bodies, tribunals, etc., that are functioning for the purposes of administration of justice in India are the “judicial authorities” under the A&C Act, 1996.
All the courts, quasi-judicial bodies, tribunals, etc., in India must necessarily follow the principles of natural justice. One of such principle is giving of reasons for an order passed by them (i.e., reasoned order). Now, in A&C Act, 1996, when a “judicial authority” passes an order, either referring the matter to arbitration or refusing to refer the matter to arbitration, does it need to pass a reasoned/speaking order? Let us understand the legal position by way of following scenarios:
Scenario 1: A judicial authority is approached under Section 8 (domestic arbitration) of the A&C Act, 1996 in a matter which is subject to an arbitration agreement. The judicial authority, on prima facie examination of an “arbitration agreement”, finds that the matter is subject to arbitration and refers the parties to arbitration. The option left before the aggrieved party is to contest the arbitration proceedings and subsequently challenge it, either before the “Arbitral Tribunal” under Section 16(1)[9] of the A&C Act, 1996 or challenge the “arbitral award” itself under Section 34(2)[10] of the A&C Act, 1996.
Scenario 2: A judicial authority is approached under Section 8 (domestic arbitration) of the A&C Act, 1996 in a matter which is subject to an arbitration agreement. The judicial authority, on prima facie examination of an “arbitration agreement”, finds that the matter is not subject to arbitration and refuses to refer the parties to arbitration. The option left before the aggrieved party is, before contesting in the arbitration proceedings, it can file an appeal under Section 37(1)(a)[11] of the A&C Act, 1996[12] before the court which is authorised by law to hear appeals from original decree of the court passing such order of refusal.
Scenario 3: A judicial authority is approached under Section 45 (foreign commercial arbitration) of the A&C Act, 1996 in a matter which is subject to an arbitration agreement. The judicial authority, on prima facie examination of an “arbitration agreement”, finds that the matter is subject to arbitration and refers the parties to arbitration. The option left before the aggrieved party is to contest the arbitration from the “place” mentioned in arbitration agreement and try the remedies available under the law of place of such arbitration.[13]
Scenario 4: A judicial authority is approached under Section 45 (foreign commercial arbitration) of the A&C Act, 1996, in a matter which is subject to an arbitration agreement. The judicial authority, on prima facie examination of an “arbitration agreement”, finds that the matter is not subject to arbitration and refuses to refer the parties to arbitration. The option left before the aggrieved party is, before contesting in the arbitration proceedings, it can file an appeal under Section 50(1)(a)[14] of the A&C Act, 1996 before the court which is authorised by law to hear appeals from original decree of the court passing such order of refusal.
Now, in Scenarios 1and 3, the “judicial authority”, which on prima facie examination of an “arbitration agreement”, refers the matter to arbitration, need not pass any “reasoned/speaking order” for such reference. In a very recent case relating to arbitration, the Supreme Court in Vidya Drolia v. Durga Trading Corpn., has observed that a prima facie examination is not a full review of the case on facts, it is just a preliminary and summary discussion of proceedings.[15] As the matter under Scenarios 1 and 3 is not decided on “merits”, and as it requires detailed examination by the “Arbitral Tribunal” selected by or given to the parties, the judicial authority will not be in a position to pass a “detailed reasoned order”. And also, as the party has to necessarily participate in arbitral proceedings without getting an opportunity to appeal, the need for a “reasoned order” is not felt. And also, as the parties have an option, at least in case of “domestic arbitrations” (Section 8), to challenge the existence or validity of the arbitration agreement before the “Arbitral Tribunal” under Section 16(1) of the A&C Act, 1996 or challenge the “arbitral award” itself under Section 34(2) of the A&C Act, 1996, hence, a “reasoned order” by a “judicial authority” is not necessary at the preliminary stage. This kind of exception to the mandatory passing of a “reasoned order” (which is an important principle of natural justice) by a “judicial authority” is to promote “pro-arbitration regime” in India.
But, in Scenarios 2 and 4, the judicial authority, which on prima facie examination, refuses to refer the matter to arbitration, then such judicial authority must give a “reasoned order”. In one of the judgments relating to arbitration, a 3-Judge Bench of the Supreme Court in Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd.[16], was dealing with an issue of whether a “judicial authority”, while dealing with an objection under Section 45 of the A&C Act, 1996, about the arbitration agreement being “null and void, inoperative or incapable of being performed”, needs to decide the objection on a prima facie view of the matter or decide the objection on merits? With 2:1 majority, the Supreme Court held that the correct approach to be adopted under Section 45 at the pre-reference stage, is one of prima facie finding by the trial court as to the validity or otherwise of the arbitration agreement.[17] Justice D.M. Dharmadhikari, in his supplementing judgment with the majority, has discussed the scope of when the “judicial authority” must give a “reasoned order” and when it shall not give a “reasoned order”. His Lordships observed that
“111. … if on a prima facie examination of the documents and material on record including the arbitration agreement on which request for reference is made by one of the parties, the judicial authority or the court decides to make a reference, it may merely mention the submissions and contentions of the parties and summarily decide the objection if any raised on the alleged nullity, voidness, inoperativeness or incapability of the arbitration agreement. In case, however, on a prima facie view of the matter, which is required to be objectively taken on the basis of material and evidence produced by the parties on the record of the case, the judicial authority including a regular civil court, is inclined to reject the request for reference on the ground that the agreement is “null and void” or “inoperative” or “incapable of being performed” within the meaning of Section 45 of the Act, the judicial authority or the court must afford full opportunities to the parties to lead whatever documentary or oral evidence they want to lead and then decide the question like trial of a preliminary issue on jurisdiction or limitation in a regular civil suit and pass an elaborate reasoned order. Where a judicial authority or the court refuses to make a reference on the grounds available under Section 45 of the Act, it is necessary for the judicial authority or the court which is seized of the matter to pass a reasoned order as the same is subject to appeal to the appellate court under Section 50(1)(a) of the Act and further appeal to this Court (Supreme Court) under sub-section (2) of the said section.[18]
It is to be noted that the words “prima facie” have been inserted under Sections 8 and 45 through Arbitration and Conciliation (Amendment) Act, 201519, on the recommendations of Law Commission of India’s 246th Report20. And the basis of Law Commission’s recommendation is the majority decision of Supreme Court in Shin-Etsu Chemical Co. Ltd. case.21
The supplementing opinion of Justice D.M. Dharmadhikari, in regard with giving of “reasoned orders” while refusing the referral of the matter to arbitration, shall be followed, because, the aggrieved party does not get an opportunity to contest in the arbitration proceedings before the “Arbitral Tribunal”, by virtue of the “refusal order” by the “judicial authority”. The only remedy for the aggrieved party is filing an appeal, under Sections 37(1)(a) and 50(1)(a) respectively, to the appellate court from the order of refusal by such “judicial authority” under Sections 8 and 45 respectively. And when an appellate court decides the matter, it shall be in a position to know the reasons of “judicial authority” for what reason it has refused to refer the matter to arbitration. It is one of the facets of principles of natural justice.
† LLB student, University College of Law, Osmania University, Hyderabad, e-mail: akashbaglekar@gmail.com.
[1] (2010) 13 SCC 336, pp. 345-346,.
[2] <http://www.scconline.com/DocumentLink/0P4pSy8x>.
[3] <http://www.scconline.com/DocumentLink/7vabSnZy>.
[4] In S. 45, the wording is unless it prima facie finds that the said agreement is null and void, inoperative or incapable of being performed. On close scrutiny, the meaning of both the wordings are almost same.
[5] Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552. It is to be noted that by inserting a proviso to S. 2(2) through A&C (Amendment) Act, 2016, the legislature has relaxed the Supreme Court’s ratio decidendi, thereby applying S. 9 (interim relief by Indian courts), S. 27 (Indian courts assistance in taking evidence), and S. 37 (appeal from granting or refusal of interim relief and appeal to the Supreme Court) of the Part 1 to the Part 2 of the A&C Act, 1996.
[6] Id., at para 88.
[7] (2005) 8 SCC 618 at para 19.
[8] <http://www.scconline.com/DocumentLink/TA0St4w3>.
[9] <http://www.scconline.com/DocumentLink/C8X6A4y5>.
[10] <http://www.scconline.com/DocumentLink/teuo89l3>.
[11] <http://www.scconline.com/DocumentLink/0Vi7sQsH>.
[12] This appeal provision from refusal to refer parties to arbitration was added through the A&C (Amendment) Act, 2016.
[13] It is to be noted that the “place of arbitration” can even be India, if the arbitration agreement between the parties is silent about it. It will be decided by the “Arbitral Tribunal” based on facts and circumstances of each case, and not by the “judicial authority” which is approached under S. 45. But, generally, in practical parlance the parties (at least if it is foreign party/parties) decide the place of arbitration beforehand.
[14] <http://www.scconline.com/DocumentLink/cd4DUf7O>.
[15] (2021) 2 SCC 1: 2020 SCC Online SC 1018 at para 123.
[17] Id., at para 106.
[18] Id., at pp. 277-278.
19 <http://www.scconline.com/DocumentLink/9ajA4z9b>.
20 <http://www.scconline.com/DocumentLink/N7O69Zxv>.
21 Supra note 16.