IN THE HIGH COURT OF ANDHRA PRADESH: AMARAVATI
HON’BLE Mr. JUSTICE ARUP KUMAR GOSWAMI, CHIEF JUSTICE
ARBITRATION APPLICATION No.165 of 2014
(Through Video-Conferencing)
V.B. Cold Storage Private Limited, rep. By Director
Badam Krishna Murthy, S/o. Late Pentayya, aged
48 years, Rajulathallavalasa village, Bhimili (M),
Visakhapatnam District, Andhra Pradesh … Applicant
Versus
Bajaj Allianz General Insurance Company Limited, rep.
by its Manager, 3rd floor, P.G. Plaza, V.I.P. Road,
Visakhapatnam (A.P.) … Respondent
Counsel for the applicant : Mr. S.V.S.S. Siva Ram
Counsel for the respondent : Mr. P. Rajasekhar
Date of hearing : 16.07.2021
Date of judgment : 24.09.2021
JUDGMENT
This application is filed under Section 11(4) and (6) of the Arbitration and Conciliation Act, 1996 (for short, “the Act of 1996”) for appointment of an arbitrator.
2. The applicant is in the business of running a cold-storage for perishable consumables belonging to farmers/vendors. It had taken a Standard Fire & Special Perils Policy from the respondent-company for the year 2010-11. For the year 2011-12, the applicant had taken two Standard Fire & Special Perils Policies bearing Nos.OG-12-1819-4005- 00000009 for Rs.2,00,00,000/- (Rupees Two Crores) and OG-12-1819- 4005-00000010 for Rs.3,00,00,000/- (Rupees Three Crores) from the 2 HCJ A.A.No.165 of 2014 respondent-company on 28.05.2011. It was regularly paying the premium and submitting monthly stock declaration statements.
3. On 21.12.2011, a major fire accident had taken place in the cold-storage unit due to short circuit resulting in the entire premises of the cold-storage unit being gutted. All the commodities stored in the cold storage also went up in flames. On that day itself, the applicant informed the respondent about the incident. Discussions had ensued in between the representatives of the applicant and the respondent with regard to calculation of the claim and the applicant was informed that the calculation of loss would be on the basis of average of everyday stock values of each month, which was not acceptable to the applicant as the applicant has been submitting declaration statements basing on the quantum of stock stored on the last date of each month.
4. It is pleaded that the applicant had suffered losses to the tune of Rs.1,51,34,922/-. On 07.03,2012, the applicant addressed a letter to the surveyors of the respondent, amongst others, requesting to complete the survey report at the earliest and also requesting to recommend to the respondent to release an interim amount of Rs.60,00,000/- to disburse the same to some farmers who were under great financial loss.
5. A letter dated 05.05.2012 was issued by the applicant to the respondent to pay the claim amount of Rs.1,51,34,922/- and another letter dated 25.05.2012 was issued requesting to finalize the report on the basis of the declaration submitted by the applicant.
A letter dated 23.07.2012 was issued by the respondent that the stock declaration statements submitted by the applicant did not conform to the procedure laid down in the fire declaration policy and requested the applicant to 3 HCJ A.A.No.165 of 2014 submit fresh declarations on either the average of the values at risk on each day of the month or the highest value at risk during the month, much to the consternation of the applicant, as the respondent had never made a whisper that the stock declaration statements submitted by the applicant were not conforming to the fire declaration policy for the previous three years.
6. Subsequently, on 08.08.2012, the respondent sent a letter to the applicant enclosing a copy of the surveyor’s letter along with the mode of assessment and requesting the applicant to give its consent to enable the respondent to process the claim. It is the pleaded case of the applicant that because of the turn of events, he was in a very depressed state of mind and as vendors/farmers were constantly pressing the applicant to settle the claims and had threatened the applicant with dire consequences if the claims were not settled, the applicant had no option but to accept the survey report, which settled the claim of the applicant for Rs.62,88,241/-.
Accordingly, he was compelled to sign the Indemnity Bond, which was a pre-requisite condition for release of the aforesaid amount. On 12.12.2012, the applicant addressed a letter to the respondent informing that he was compelled to accept the insurance claim under duress and that the applicant would treat the issue of settlement as a dispute and that the applicant would initiate arbitration proceedings as per clause 10 of the General Conditions of the Commercial Package Policy and the said letter was received by the respondent on 17.12.2012. On a request being made, one Sri Vijairagavan agreed to be an arbitrator and he entered on arbitration proceedings on 06.04.2013 and communicated the same to the applicant and the respondent.
The arbitrator issued proceedings dated 18.04.2013 and requested the respondent to appoint 4 HCJ A.A.No.165 of 2014 an arbitrator within the time schedule prescribed in the policies to enable both the arbitrators to appoint a third arbitrator forming a tribunal and proceed for resolution of the dispute. The respondent, however, did not appoint a second arbitrator and such fact was also communicated by the arbitrator to the applicant. Since the respondent had not taken any action, recourse is taken by the applicant seeking appointment of an arbitrator on behalf of the respondent.
7. A counter-affidavit was filed by the respondent. While admitting that the entire premises of the cold-storage unit was gutted along with all the commodities stored in the cold-storage unit belonging to various farmers/vendors, it is stated that the applicant having received an amount of Rs.62,88,241/- as full and final settlement of his claim by voluntarily executing Indemnity Bond, Discharge Bond and also consent letter without raising any protest and demur, cannot seek appointment of an arbitrator.
It is stated that the declaration submitted by the applicant was not in conformity with the procedure prescribed in the policy and the I.R.D.A. surveyors assessed the loss by two methods – by one method, assessment was quantified at Rs.63,00,216/- and by the other method, at Rs.48,44,496/- and the applicant had accepted the second method of assessment. The plea set up by the applicant that the claim was accepted under duress was denied and it is pleaded that the execution of Indemnity Bond, Discharge Bond and consent letter were voluntarily accepted by the applicant and, therefore, the arbitration application is liable to be dismissed as there was no existing dispute.
8. A reply-affidavit was filed by the applicant reiterating the plea of execution of documents under duress. It is stated that within a week from the receipt of an amount of Rs.62,88,241/-, the applicant addressed 5 HCJ A.A.No.165 of 2014 a letter to the respondent requesting it to pay the balance claimed amount and, therefore, the present application for appointment of an arbitrator is maintainable.
9. Mr. S.V.S.S. Siva Ram, learned counsel for the applicant, submits that acceptance of the amount under duress to tide over difficulties faced, cannot stand in the way of appointment of an arbitrator on the respondent’s side, as the respondent had not paid the balance amount of Rs.93,50,466/-. He placed reliance on a three-Judge Bench judgment of the Hon’ble Supreme Court in Mayavati Trading Private Limited v. Pradyuat Deb Burman, reported in (2019) 8 SCC 714, a judgment of the Hon’ble Supreme Court in Oriental Insurance Co. Ltd. V. Dicitex Furnishing Ltd., reported in (2020) 2 SCC 464 and a judgment dated 13.02.2019 rendered by a learned single Judge of the High Court for the State of Telangana in M/s. Sitaram Spinners Pvt. Ltd., Hyderabad v. New India Assurance Co. Ltd., Secunderabad (Arbitration Application No.22 of 2017), wherein the learned single Judge had observed that in view of Section 11(6-A) of the Act of 1996, the High Court while considering the application under Section 11(5) & (6) of the Act of 1996 shall confine itself to examination of the existence of an arbitration agreement and no more.
10. Abiding by the stand taken in the counter-affidavit, Mr. P. Rajasekhar, learned counsel for the respondent, submits that the Indemnity Bond, Discharge Bond and consent letter were voluntarily executed by the applicant and after four months of such execution, a false plea is raised that such execution of documents was made under duress and in compelling circumstances. It is contended that as the applicant had acknowledged the amount of Rs.62,88,241/- as full and final 6 HCJ A.A.No.165 of 2014 settlement of all the claims of the applicant, there is no dispute regarding any claim remaining outstanding and, therefore, the application is mis-conceived.
11. I have considered the submission of the learned counsel for the parties and have perused the materials on record.
12. At the outset, it will be relevant to take note of Clause 10 relating to dispute resolution as engrafted in the Commercial Package Policy. Clause 10 reads as under:
“10. Dispute Resolution
a) If any dispute or difference shall arise as to the quantum to be paid under this Policy (liability being otherwise admitted), such difference shall independently of all other question be referred to the decision of a sole arbitrator to be appointed in writing by the parties to or if they cannot agree upon a single arbitrator within 30 days of any party invoking arbitration, the same shall be referred to a panel of three arbitrators, comprising of two arbitrators one to be appointed by each of the parties to the dispute/difference and the third arbitrator to be appointed by such two arbitrators and arbitration shall be conducted under and in accordance with the provisions of the Arbitration and Conciliation Act, 1996. The law of the arbitration will be Indian law, and the seat of arbitration and venue for all hearings shall be within India.
b) It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as herein before 7 HCJ A.A.No.165 of 2014 provided if the Company has disputed or not accepted liability under or in respect of this Policy.
c) It is hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this Policy that the award by such arbitrator/arbitrators of the amount of the loss or damage shall be first obtained.
d) It is also hereby further expressly agreed and declared that if the Company shall disclaim liability to the insured for any claim hereunder and such claim shall not, within 12 calendar months from the date of such disclaimer having been made the subject matter of a suit in a court of law, then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder.
e) In the event that these arbitration provisions shall be held to be invalid then all such disputes or differences shall be referred to the exclusive jurisdiction of the Indian Courts.”
13. It is to be noted that the respondent has not denied that the Commercial Package Policy is not applicable in between the parties and that there is no agreement for resolving the disputes through arbitration. Thus, the existence of an arbitration clause in the contract of insurance is not in dispute. The question that arises for consideration is whether the discharge of liability in the present case upon acceptance of the compensation amount by signing the Indemnity Bond, Discharge Bond and consent letter was voluntary or under coercion or undue influence 8 HCJ A.A.No.165 of 2014 and whether the applicant is justified in invoking Section 11(6) of the Act of 1996.
14. In United India Insurance Company Limited v. Antique Art Exports Private Limited, reported in (2019) 5 SCC 362, the Hon’ble Supreme Court, while noting that execution of full and final settlement, receipt or a discharge voucher in itself cannot be a bar to arbitration, had relied on para 44 of the judgment in National Insurance Company Limited v. Boghara Polyfab (P) Ltd., reported in (2009) 1 SCC 267. In Boghara Polyfab (P) Ltd. (supra), at para 44, it was observed as follows:
“44. None of the three cases relied on by the appellant lay down a proposition that mere execution of a full and final settlement receipt or a discharge voucher is a bar to arbitration, even when the validity thereof is challenged by the claimant on the ground of fraud, coercion or undue influence. Nor do they lay down a proposition that even if the discharge of contract is not genuine or legal, the claims cannot be referred to arbitration. In all the three cases, the Court examined the facts and satisfied itself that there was accord and satisfaction or complete discharge of the contract and that there was no evidence to support the allegation of coercion/undue influence.”
15. It was held that a mere plea of fraud, coercion or undue influence in itself is not enough and the party who alleged the same is under an obligation to prima facie establish the same by placing satisfactory 9 HCJ A.A.No.165 of 2014 material on record before the Chief Justice or his Designate to exercise power under Section 11(6) of the Act of 1996.
16. In para 20 of the Antique Art Exports Private Limited (supra), it was held as follows:
“20. The submission of the learned counsel for the respondent that after insertion of sub-section (6-A) to Section 11 of the Amendment Act, 2015 the jurisdiction of this Court is denuded and the limited mandate of the Court is to examine the factum of existence of an arbitration and relied on the judgment in Duro Felguera, SA v. Gangavaram Port Ltd. [Duro Felguera, SA v. Gangavaram Port Ltd., (2017) 9 SCC 729 : (2017) 4 SCC (Civ) 764] The exposition in this decision is a general observation about the effect of the amended provisions which came to be examined under reference to six arbitrable agreements (five agreements for works and one corporate guarantee) and each agreement contains a provision for arbitration and there was serious dispute between the parties in reference to constitution of Arbitral Tribunal whether there has to be Arbitral Tribunal pertaining to each agreement.
In the facts and circumstances, this Court took note of sub-section (6-A) introduced by the Amendment Act, 2015 to Section 11 of the Act and in that context observed that the preliminary disputes are to be examined by the arbitrator and are not for the Court to be examined within the limited scope available for appointment of arbitrator 10 HCJ A.A.No.165 of 2014 under Section 11(6) of the Act. Suffice it to say that appointment of an arbitrator is a judicial power and is not a mere administrative function leaving some degree of judicial intervention; when it comes to the question to examine the existence of a prima facie arbitration agreement, it is always necessary to ensure that the dispute resolution process does not become unnecessarily protracted.
17. In the factual matrix of the case as presented in Antique Art Exports Private Limited (supra), the Hon’ble Supreme Court observed that prima facie no dispute subsisted after the discharge voucher being signed by the respondent without any demur or protest and claim being finally settled with accord and satisfaction and after 11 weeks of the settlement of claim a letter was sent on 27-7-2016 for the first time raising a voice in the form of protest that the discharge voucher was signed under undue influence and coercion with no supportive prima facie evidence being placed on record. Accordingly, in absence thereof, it was held that it must follow that the claim had been settled with accord and satisfaction leaving no arbitral dispute subsisting under the agreement to be referred to the arbitrator for adjudication.
18. Section 11 (6-A) of the Act of 1996 was inserted by Act 3 of 2016 with effect from 23.10.2015. Section 11 (6-A) reads as follows:
“11. (6-A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub- section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any 11 HCJ A.A.No.165 of 2014 court, confine to the examination of the existence of an arbitration agreement.”
19. Section 11(6-A) was omitted by Act 33 of 2019. However, Section 3 of the Amendment Act of 2019 insofar as it pertains to this omission has not yet been brought into force.
20. In Duro Felguera, SA v. Gangavaram Port Ltd., reported in (2017) 9 SCC 729, at para 48, the Hon’ble Supreme Court had observed that the intention of the legislature is crystal clear that the court should and need only look into one aspect, which is 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, in that 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. At para 59, it was observed that scope of the power under Section 11(6) of the Act of 1996 was considered in the decisions in SBP & Co. v. Patel Engg. Ltd., reported in (2005) 8 SCC 618 and Boghara Polyfab (P) Ltd. (supra) and the said position continued till the amendment was brought about in the year 2015. It was emphasized that after the amendment, all that the courts need to see is whether an arbitration agreement exists – nothing more nothing less. It was further observed that 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.
21. In Mayavati Trading Private Limited (supra), it was observed that prior to insertion of Section 11 (6-A), the Hon’ble Supreme Court in 12 HCJ A.A.No.165 of 2014 several judgments, beginning with SBP & Co. (supra) has held that at the stage of a Section 11(6) application being filed, the court need not merely confine itself to the examination of the existence of an arbitration agreement but could also go into certain preliminary questions such as stale claims, accord and satisfaction having been reached, etc.
22. Following Duro Felguera (supra), the Hon’ble Supreme Court in Mayavati Trading Private Limited (supra) observed that the law prior to the 2015 Amendment that has been laid down by the court which would have included going into whether accord and satisfaction has taken place, has now been legislatively overruled. It was held that Section 11(6-A) is confined to the examination of the existence of an agreement and is to be understood in the narrow sense as has been laid down in the judgment in Duro Felguera (supra) and taking that view, the judgment in Antique Art Exports Private Limited (supra) was overruled as having not laid down the correct law.
23. In Oriental Insurance Company and another v. Dicitex Furnishing Limited, reported in (2020) 4 SCC 621, the decision of the Bombay High Court appointing an arbitrator was challenged on the ground that Dicitex having accepted the proffered amounts and having withdrawn the reservation and protest, it could not have argued that it was subjected to coercion or that the appellant forced it to sign the final discharge voucher.
The Bombay High Court had, prima facie, observed that it would be appropriate that the issue raised by the Oriental Insurance Company that Dicitex had signed such discharge voucher unconditionally and the issue raised by Dicitex that the same was under duress and coercion is conclusively decided by the Arbitral Tribunal and if necessary, by leading oral evidence.
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24. On consideration of the materials on record, the Hon’ble Supreme Court dismissed the appeal. It was also observed at para 26 as follows:
“26. An overall reading of Dicitex’s application [under Section 11(6)] clearly shows that its grievance with respect to the involuntary nature of the discharge voucher was articulated. It cannot be disputed that several letters — spanning over two years–stating that it was facing financial crisis on account of the delay in settling the claim, were addressed to the appellant. This Court is conscious of the fact that an application under Section 11(6) is in the form of a pleading which merely seeks an order of the court, for appointment of an arbitrator. It cannot be conclusive of the pleas or contentions that the claimant or the party concerned can take in the arbitral proceedings.
At this stage, therefore, the court which is required to ensure that an arbitrable dispute exists, has to be prima facie convinced about the genuineness or credibility of the plea of coercion; it cannot be too particular about the nature of the plea, which necessarily has to be made and established in the substantive (read : arbitration) proceeding. If the court were to take a contrary approach and minutely examine the plea and judge its credibility or reasonableness, there would be a danger of its denying a forum to the applicant altogether, because rejection of the application would render the finding (about the finality of the discharge and its effect as satisfaction) final, thus, precluding the 14 HCJ A.A.No.165 of 2014 applicant of its right event to approach a civil court.
There are decisions of this Court (Associated Construction v. Pawanhans Helicopters Ltd. [Associated Construction v. Pawanhans Helicopters Ltd., (2008) 16 SCC 128] and Boghara Polyfab [National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 : (2009) 1 SCC (Civ) 117] which upheld the concept of economic duress. Having regard to the facts and circumstances, this Court is of the opinion that the reasoning in the impugned judgment [Dicitex Furnishing Ltd. v. Oriental Insurance Co. Ltd., 2015 SCC OnLine Bom 5055] cannot be faulted.
25. In Dicitex Furnishing Limited (supra), the Hon’ble Supreme Court had not considered Section 11(6-A) of the Act of 1996. The decision rendered by the three-Judge Bench in Mayavati Trading Private Limited (supra) was also not brought to the notice and it was on the basis of consideration of the materials on record, the Hon’ble Supreme Court had accepted that Dicitex was facing financial distress and economic distress and in view of its various urgent business liabilities, it apparently signed the said discharge voucher reluctantly and that the Oriental Insurance Company had refused to accept such discharge voucher signed by Dicitex with letter of protest.
26. In view of the decision rendered in Mayavati Trading Private Limited (supra), wherein a three-Judge Bench of the Hon’ble Supreme Court had observed that as Section 11(6-A) is confined to the examination of the existence of an arbitration agreement and is to be understood in a narrow sense and as the law which enabled the court to examine as to 15 HCJ A.A.No.165 of 2014 whether accord and satisfaction had taken place has been legislatively overruled, it will not be necessary for this Court to go into the aforesaid question as to whether the applicant had voluntarily executed Indemnity Bond, Discharge Bond and also consent letter or whether the applicant had signed such indemnity bond, discharge bond and also consent letter unconditionally and the same is left open to be decided by the Arbitral Tribunal.
27. In Vidya Drolia and others v. Durga Trading Corporation, reported in (2019) 20 SCC 406, a reference was made to a Bench of three Judges vide order dated 28.02.2019 as it doubted the legal ratio expressed in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, reported in (2017) 10 SCC 706 that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882 are not arbitrable as this would be contrary to public policy. The reference was answered in Vidya Drolia and others v. Durga Trading Corporation, reported in (2021) 2 SCC 1, which, hereinafter shall be referred to as Vidya Drolia 2 (supra) whenever necessary. The Hon’ble Supreme Court observed that the issues required to be answered relate to two distinct but interconnected matters, viz:
“2.1. (i) Meaning of non-arbitrability and when the subject-matter of the dispute is not capable of being resolved through arbitration.
2.2. (ii) The conundrum — “who decides” — whether the court at the reference stage or the Arbitral Tribunal in the arbitration proceedings would decide the question of non-arbitrability.
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2.3. The second aspect also relates to the scope and ambit of jurisdiction of the court at the referral stage when an objection of non-arbitrability is raised to an application under Section 8 or 11 of the Arbitration and Conciliation Act, 1996 (for short “the Arbitration Act”).”
28. In Vidya Drolia 2 (supra), the Hon’ble Supreme Court propounded a four-fold test for determining when the subject matter of the dispute in an arbitrable agreement is not arbitrable. It was also observed that the aforesaid principles ought to be applied with care and caution. While overruling the ratio laid down in Himangni Enterprises (supra), it was held that landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration. It was, however, held that landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or 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. The Hon’ble Supreme Court at para 86 held that the legal position as to who decides the question of non-arbitrability under the Act of 1996 can be divided into four phases, which reads as follows:
“86. 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 Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] on 26-10-2005. For nearly ten years, the ratio expressed 17 HCJ A.A.No.165 of 2014 in Konkan Railway Corpn. Ltd. v. Mehul Construction Co. [Konkan Railway Corpn. Ltd. v. Mehul Construction Co., (2000) 7 SCC 201] , affirmed by the Constitution Bench of five Judges in Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd. [Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd., (2002) 2 SCC 388] , had prevailed.
The second phase commenced with the decision in Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] till the legislative amendments, which were made to substantially reduce court interference and overrule the legal effect of Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] vide Act 3 of 2016 with retrospective effect from 23-10- 2015. The third phase commenced with effect from 23- 10-2015 and continued till the enactment of Act 33 of 2019 with effect from 9-8-2019, from where commenced the fourth phase, with a clear intent to promote institutionalised arbitration rather than ad hoc arbitration. The amendments introduced by Act 33 of 2019 have been partially implemented and enforced.”
29. Reference was made to the two-Judge Bench decision in Boghara Polyfab (P) Ltd. (supra) wherein the Hon’ble Supreme Court had identified and segregated the issues that arise for consideration in an application under Section 11 the Act of 1996 into three categories and had reproduced para 22 in that context. It will be appropriate to take note of para 22.1 of Boghara Polyfab (P) Ltd. (supra), which is as under:
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“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 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.”
30. The Hon’ble Supreme Court in Vidya Drolia 2 (supra), in the Indian context, adopted three categories as identified in Boghara Polyfab (P) Ltd. (supra). It was observed as follows:
“138 …
The first category of issues, namely, whether the party has approached the appropriate High Court, whether there is an arbitration agreement and whether the party who has applied for reference is party to such agreement would be subject to more thorough examination in comparison to the second and third categories/issues which are presumptively, save in exceptional cases, for the arbitrator to decide. In the first category, we would add and include the question or issue relating to whether the cause of action relates to action in personam or rem; whether the subject-matter of the dispute affects third- party rights, have erga omnes effect, requires centralised adjudication; whether the subject-matter relates to inalienable sovereign and public interest functions of the State; and whether the subject-matter of dispute is 19 HCJ A.A.No.165 of 2014 expressly or by necessary implication non-arbitrable as per mandatory statute(s). Such questions arise rarely and, when they arise, are on most occasions questions of law.
On the other hand, issues relating to contract formation, existence, validity and non-arbitrability would be connected and intertwined with the issues underlying the merits of the respective disputes/claims. They would be factual and disputed and for the Arbitral Tribunal to decide.”
31. While dealing with the omission of sub-section (6-A) by Act 33 of 2019, it was observed that the same was with a specific object and purpose and is relatable to substitution of sub-sections (12), (13) and (14) of Section 11 of the Act of 1996 by Act 33 of 2019.
32. In the light of the above background, it was observed that it would be wrong to accept that post omission of sub-section (6-A) of Section 11, the ratio in SBP & Co. (supra) would become applicable.
33. Proceeding to examine the question as to whether the word “existence” in Section 11 refers to contract formation (whether there is an arbitration agreement) and excludes the question of enforcement (validity) and therefore the latter falls outside the jurisdiction of the court at the referral stage, it was held that existence of an arbitration agreement pre-supposes a valid agreement. It was held that a reasonable and just interpretation of “existence” requires understanding the context, the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere 20 HCJ A.A.No.165 of 2014 and abide by the terms. A void and unenforceable understanding is no agreement to do anything. In that context, it was held that existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law. At paragraphs, 139, 140 & 141, it was observed as follows:
“139. We would not like to be too prescriptive, albeit observe that the court may for legitimate reasons, to prevent wastage of public and private resources, can 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. Undertaking a detailed full review or a long-drawn review at the referral stage would obstruct and cause delay undermining the integrity and efficacy of arbitration as a dispute resolution mechanism. Conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. There are certain cases where the prima facie examination may require a deeper consideration. The court’s challenge is to find the right amount of and the context when it would examine the prima facie case or exercise restraint. The legal order needs a right balance between avoiding arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the matter is clearly non-arbitrable.”
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140. Accordingly, when it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the Arbitral Tribunal selected by the parties by consent. The underlying rationale being not to delay or defer and to discourage parties from using referral proceeding as a ruse to delay and obstruct. In such cases a full review by the courts at this stage would encroach on the jurisdiction of the Arbitral Tribunal and violate the legislative scheme allocating jurisdiction between the courts and the Arbitral Tribunal. Centralization of litigation with the Arbitral Tribunal as the primary and first adjudicator is beneficent as it helps in quicker and efficient resolution of disputes.”
141. The court would exercise discretion and refer the disputes to arbitration when it is satisfied that the contest requires the Arbitral Tribunal should first decide the disputes and rule on non-arbitrability. Similarly, discretion should be exercised when the party opposing arbitration is adopting delaying tactics and impairing the referral proceedings. Appropriate in this regard, are observations of the Supreme Court of Canada in Dell Computer Corpn. v. Union des Consommateurs & Olivier Dumoulin [Dell Computer Corpn. v. Union des Consommateurs & Olivier Dumoulin, 2007 SCC OnLine Can SC 34 : (2007) 2 SCR 801 : 2007 SCC 34] , which read: (SCC OnLine Can SC paras 85-86) 22 HCJ A.A.No.165 of 2014 “85. If the challenge requires the production and review of factual evidence, the court should normally refer the case to arbitration, as arbitrators have, for this purpose, the same resources and expertise as courts. Where questions of mixed law and fact are concerned, the court hearing the referral application must refer the case to arbitration unless the questions of fact require only superficial consideration of the documentary evidence in the record.
86. Before departing from the general rule of referral, the court must be satisfied that the challenge to the arbitrator’s jurisdiction is not a delaying tactic and that it will not unduly impair the conduct of the arbitration proceeding. This means that even when considering one of the exceptions, the court might decide that to allow the arbitrator to rule first on his or her competence would be best for the arbitration process.”
34. It was further held that the court at the referral stage would apply the prima facie test with regard to the expression “existence of an arbitration agreement” in Section 11 of the Arbitration Act, which includes aspect of validity of an arbitration agreement on the basis of principles set out in the judgment. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the Arbitral Tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.
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35. The Hon’ble Supreme Court held that limitation law being procedural and normally disputes being factual, it would be for the arbitrator to decide guided by the facts found and the law applicable. The court at the referral stage can interfere only when it is manifest that the claims are ex-facie time-barred and dead or there is no subsisting dispute. All other cases should be referred to the Arbitral Tribunal for decision on merits. It was also held that similar would be the position in case of disputed “no-claim certificate” or defence on the plea of novation and “accord and satisfaction”
36. At para 154, discussion under the heading “Who Decides Arbitrability”, is crystallized as follows:
“154. Discussion under the heading “Who Decides Arbitrability?” can be crystallised as under: 154.1. Ratio of the decision in Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] on the scope of judicial review by the court while deciding an application under Sections 8 or 11 of the Arbitration Act, post the amendments by Act 3 of 2016 (with retrospective effect from 23-10-2015) and even post the amendments vide Act 33 of 2019 (with effect from 9-8-2019), is no longer applicable.
154.2. Scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted.
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154.3. The general rule and principle, in view of the legislative mandate clear from Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-
competence, is that the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of non-arbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.
154.4. Rarely as a demurrer the court may interfere at Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable” and to cut off the deadwood.
The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings. This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the 25 HCJ A.A.No.165 of 2014 jurisdiction of the Arbitral Tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism.”
37. In view of the discussions above, notwithstanding that the petitioner had executed Indemnity Bond, Discharge Bond and consent letter, as the petitioner had raised various pleas with regard to such execution, the dispute between the parties is required to be referred to an arbitrator, as there is a valid arbitration agreement.
38. Resultantly, the Arbitration Application is allowed. Dr. Justice B. Siva Sankara Rao is appointed as arbitrator to adjudicate the disputes between the parties. No costs. Pending miscellaneous applications, if any, shall stand closed.
39. The fee of the arbitrator as well as the other terms and conditions shall be settled by the parties in consultation with the arbitrator so appointed. Registry will send a copy of this order to Dr. Justice B. Siva Sankara Rao in his proper address.
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