Supreme Court Post Vidya Drolia: Reconsidering Referral Jurisprudence in India

The scope of Section 11¹ of the Arbitration and Conciliation Act, 1996 (the Act) has undergone significant change over time by way of legislative amendments and judicial pronouncements. This provision allows parties to approach courts for the appointment of arbitrators. In Vidya Drolia v. Durga Trading Corpn.² (Vidya Drolia), the Supreme Court attempted to settle the law on the permissible extent of a court's ability to interfere at the stage of an application under Section 11 of the Act. If the intention of the Supreme Court was to limit grounds of interference, subsequent developments suggest that this endeavour may not have been successful. Subsequent pronouncements have traversed far beyond what Vidya Drolia³ sought to settle, and have broadened the scope of review, judicially “pushing” the position of law back to the pre-2015 amendment stage.

In this article, the changing scope of a Court's examination at the Section 11 stage of a proceeding is explored, in the aftermath of Vidya Drolia⁴, by analysing two decisions of the Supreme Court: (1) DLF Home Developers Ltd. v. Rajapura Homes (P) Ltd.⁵ (DLF Home); and (2) Indian Oil Corpn. Ltd. v. NCC Ltd.⁶ (IOCL).

2015 Amendment — Section 11(6-A) of the Act

Section 11(6-A)⁷ was inserted by way of an amendment made to the Act in October 2015⁸, to confine the scope of a court's interference at the Section 11 stage to merely examining the existence of an arbitration agreement, thereby legislatively overruling earlier pronouncements conferring wide powers to courts. All other preliminary or threshold issues were left to be decided by the arbitrator under Section 16⁹ of the Act, as held in Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.¹⁰ (Uttarakhand Purv). While Section 11(6-A) was proposed to be omitted¹¹ from the Act in view of the introduction of an institutionalised arbitration regime under the Act, the provision deleting Section 11(6-A) is yet to be notified. Moreover, the Supreme Court (in Vidya Drolia¹² and DLF Home¹³) has held that the principles underlying Section 11(6-A) would continue to apply and that the omission of Section 11(6-A) would not restore the law which existed prior to the 2015 Amendment.

What Vidya Drolia held

In Vidya Drolia¹⁴, the Supreme Court confined the interference of the Court under Section 11 to only when it was manifestly and ex facie certain that the arbitration agreement was non-existent or invalid. It further held that the question of non-arbitrability of the disputes could also be examined by the courts at the reference stage to protect parties from being forced to arbitrate when it was demonstrably non-arbitrable and “to cut off the deadwood”. Pertinently, the Court also held that “for legitimate reasons” and “to prevent wastage of public and private resources”, the Courts could exercise judicial discretion to conduct “an intense yet summary prima facie review while remaining conscious that it is to assist the arbitration procedure and not usurp jurisdiction of the Arbitral Tribunal”.

Thus, the reasoning adopted in Vidya Drolia¹⁵ was in alignment with a settled line of judgments which constrained the court's interference to a prima facie examination at Section 11 stage. However, it also widened the ambit of judicial discretion, by providing for an intense (albeit prima facie) review upon the existence of “legitimate reasons” and thereby, preventing a reference to arbitration. The examination at Section 11 stage, therefore, would not be limited to merely examining whether there existed an arbitration agreement in writing.

Developments post Vidya Drolia

The Supreme Court in DLF Home¹⁶ was adjudicating whether the disputes sought to be referred to arbitration under Section 11(6) fell within the scope of the arbitration clause at issue in that case. It held that, while adjudicating an application under Section 11(6), the Court could look beyond the bare existence of an arbitration clause. While holding so, the Court placed reliance on Vidya Drolia¹⁷and specifically, the latter's emphasis on weeding out any frivolous or vexatious claims to prevent wastage of public and private resources. The Court also went a step further and held that the courts ought to determine not only the existence of a written arbitration agreement, but also whether the aggrieved party had made out a prima facie arguable case. In fact, the Supreme Court imposed a positive duty on the court “to apply their mind to the core preliminary issues, albeit, within the framework of Section 11(6-A) of the Act”.

Thereafter, the Supreme Court in IOCL¹⁸ was concerned with the scope of the inquiry at Section 11 stage — specifically if the Court could determine whether there had been an “accord and satisfaction” of the claims between the parties. The Supreme Court held that at Section 11 stage, the Court could prima facie consider the aspect of “accord and satisfaction” of the claims and that the scope of inquiry was not confined to merely ascertaining whether a binding arbitration agreement existed. It, however, cautioned that the same should be left to the Arbitral Tribunal in cases of “disputable facts” or a “reasonably arguable case”. The Court went onto hold that it could decide disputes, including the question of jurisdiction and non-arbitrability, at the Section 11 stage, if the facts were very clear and glaring and in view of the specific clauses in the agreement binding between the parties.

Analysis

In DLF Home¹⁹, while referring to Vidya Drolia²⁰, the Court widened its scope at the stage of reference to include the determination of “core preliminary issues” between the parties and see if a prima facie arguable case existed. This approach would appear to be in direct conflict with the principle of minimal judicial interference embodied under Section 5 of the Act²¹ as well as the UNCITRAL Model Law.²² It could never have been the intent of the drafters of the Act to introduce a mini trial of the issues between the parties at the stage of reference. The correct approach would be for the Court to only examine the existence of an arbitration agreement and leave all further preliminary issues to be decided by the arbitrator under Section 16 of the Act, as held in Uttarakhand Purv.²³

Thereafter, the Supreme Court in IOCL²⁴ further broadened the scope of scrutiny at the Section 11 stage by deciding whether there was an accord and satisfaction of the claims between the parties. Ordinarily, such a question would fall within the realm of disputed questions of fact and would be relegated to the Arbitral Tribunal to decide. Prior to IOCL²⁵, the Supreme Court in Mayavati Trading (P) Ltd. v. Pradyut Deb Burman²⁶ (Mayavati) (which has been referred to and relied upon in Vidya Drolia²⁷), held that examination under Section 11(6-A) was confined to existence of an arbitration agreement and was to be understood in the narrow sense. Specifically, it overruled the decision in United India Insurance Co. Ltd. v. Antique Art Exports (P) Ltd.²⁸, where the Court had ventured into the question of whether the claim was settled by accord and satisfaction and accordingly, held that no dispute subsisted under the agreement to be referred to the arbitrator.

In effect, the Court in IOCL²⁹ ended up doing exactly what the Court in Mayavati³⁰ sought to prevent — courts venturing, at the reference stage, into the merits to determine whether any prima facie dispute subsisted between the parties. Although the Court in IOCL³¹ referred the issue of accord and satisfaction to be decided by the Arbitral Tribunal on viewing that the issue was debatable and involved an extensive examination of facts, the Court has effectively resurrected the accord and satisfaction test, however, “restricting” the same to a prima facie consideration.

In this manner, the courts, while purportedly relying on Vidya Drolia³², are expanding the scope of examination beyond the existence of an arbitration agreement and deciding disputed questions of fact. In such a manner, these references would appear to go against both the letter and spirit of the decision of the Supreme Court in Vidya Drolia.³³

Conclusion

A review of the decisions in Vidya Drolia³⁴, DLF Home³⁵ and IOCL³⁶ clearly indicates a shift in the Court's approach from merely examining the existence of a written arbitration agreement at Section 11 stage.

In our view, the leeway granted to Courts in Vidya Drolia³⁷ was meant to be used sparingly in genuine and legitimate cases, where reference to arbitration would lead to wastage of resources and/or multiplicity of proceedings. The Supreme Court was conscious about the problems associated with expanding the scope of scrutiny and also warned against usurping the jurisdiction of the Arbitral Tribunal by urging courts to adopt a “balanced approach”. It was only meant to bestow some degree of discretion and flexibility, if such a need arose. However, the developments in DLF Home³⁸ and IOCL³⁹ run counter to the reasoning in Vidya Drolia.⁴⁰ It would therefore be necessary for the Supreme Court to immediately clarify the ratio laid down in Vidya Drolia⁴¹ insofar as the extent of judicial intervention at the stage of reference is concerned.