2023 (5) TMI 510 - SC - Indian Laws

High Court to Reassess Arbitration Agreement Validity, Resolve Within Three Months Under Arbitration Act.

Magic Eye Developers Pvt. Ltd. Versus M/s. Green Edge Infrastructure Pvt. Ltd. & Ors. Etc.

The Court determined that the High Court failed to conclusively decide on the existence and validity of the arbitration agreement at the pre-referral ... Jurisdiction of the referral court at pre-referral stage - existence and validity of an arbitration agreement - Section 11(6) of the Arbitration and Conciliation Amendment Act, 2015 - HELD THAT:- Post-Arbitration and Conciliation Amendment Act, 2015, the jurisdiction of the court under Section 11(6) of the Act is limited to examining whether an arbitration agreement exists between the parties – “nothing more, nothing less”. Thus, as per the Section 11(6A) of the Act, it is the duty cast upon the referral court to consider the dispute/issue with respect to the existence of an arbitration agreement. It is required to be noted that as per the settled position of law, pre-referral jurisdiction of the court under Section 11(6) of the Arbitration Act is very narrow and inheres two inquiries. The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant’s privity to the said agreement - The Secondary inquiry that may arise at the reference stage itself is with respect to the non-arbitrability of the dispute. Both are different and distinct. So far as the first issue with respect to the existence and the validity of an arbitration agreement is concerned, as the same goes to the root of the matter, the same has to be to conclusively decided by the referral court at the referral stage itself. If the dispute/issue with respect to the existence and validity of an arbitration agreement is not conclusively and finally decided by the referral court while exercising the pre-referral jurisdiction under Section 11(6) and it is left to the arbitral tribunal, it will be contrary to Section 11(6A) of the Arbitration Act. It is the duty of the referral court to decide the said issue first conclusively to protect the parties from being forced to arbitrate when there does not exist any arbitration agreement and/or when there is no valid arbitration agreement at all. The impugned common judgment and order passed by the High Court in respective Arbitration Petitions, referring the disputes to arbitration is hereby quashed and set aside. The matter is remitted back to the High Court/referral court to decide the respective arbitration petitions afresh - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether, at the pre-referral stage under Section 11(6) of the Arbitration and Conciliation Act as amended (via insertion of Section 11(6A)), the referral court is required to conclusively determine the existence and validity of an arbitration agreement (including questions of parties/privity), or whether that issue can be left for the arbitral tribunal to decide. 2. Whether the referral court, while exercising pre-referral jurisdiction under Section 11(6), may or must undertake a prima facie assessment of the arbitrability of the dispute and the interconnection of related agreements, and to what extent such prima facie review is permissible after insertion of Section 11(6A). 3. Whether a referral order that does not finally decide the existence/validity of an arbitration agreement but instead leaves that question to the arbitral tribunal is consistent with Section 11(6A) and the duty of the referral court to protect parties from being compelled to arbitrate in the absence of an arbitration agreement. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Pre-referral duty to decide existence and validity of arbitration agreement Legal framework: Section 11(6) and the post-2015 addition, Section 11(6A), confine the court's role while considering applications for appointment of arbitrators to the examination of the existence of an arbitration agreement. Precedent treatment: The Constitution Bench ruling that 'sans an agreement, there cannot be any reference to arbitration' and decisions recognizing a narrow pre-referral jurisdiction (including identification of primary and secondary inquiries) are followed and applied. Prior authority allowing prima facie assessment of arbitrability (to 'cut the deadwood') is acknowledged but distinguished in scope from determination of existence/validity. Interpretation and reasoning: The insertion of Section 11(6A) limits the referral court to examining existence of an arbitration agreement - 'nothing more, nothing less.' The Court distinguishes between (a) existence/validity/privity (primary inquiry) which goes to the root of jurisdiction and requires thorough, conclusive judicial determination at the pre-referral stage; and (b) non-arbitrability (secondary inquiry) where only a prima facie assessment may be undertaken in appropriate cases. The reasoning emphasizes that leaving existence/validity to the arbitral tribunal would permit parties to be compelled into arbitration without any agreement - contrary to Section 11(6A) and settled principle that an arbitration cannot proceed sans agreement. Ratio vs. Obiter: Ratio - referral courts must conclusively decide existence and validity (including parties/privity) of an arbitration agreement at the pre-referral stage under Section 11(6)/(6A). Obiter - observations on the permissible scope of prima facie review of non-arbitrability (as limited by prior authorities) further explain limits but do not detract from the primary holding. Conclusions: The referral court is duty-bound to conclusively determine whether an arbitration agreement exists and is valid before referring disputes to arbitration; it cannot leave that core jurisdictional question to the arbitral tribunal. Issue 2 - Scope of prima facie assessment of arbitrability and interconnection of agreements Legal framework: Section 11(6A) narrows pre-referral inquiry to existence of agreement; established jurisprudence permits prima facie review of arbitrability only to eliminate plainly non-arbitrable claims at the outset. Precedent treatment: The Vidya Drolia line is recognized for permitting prima facie examination of arbitrability to 'cut the deadwood.' Decisions on reading interconnected agreements together are cited as authority for treating related documents as a composite arrangement where appropriate, but such merits determinations remain for the referral court to decide when raised. Interpretation and reasoning: The Court reiterates that prima facie assessment remains available for non-arbitrability where dismissal at the first stage is plainly warranted; however, such prima facie review is distinct from and cannot substitute for a conclusive determination on existence/validity. Where the interconnection of multiple agreements is asserted to carry an arbitration clause into a particular instrument, that contention implicates existence/privity and must be determined conclusively by the referral court rather than deferred as an 'involved issue' to the arbitral tribunal. Ratio vs. Obiter: Ratio - prima facie review of non-arbitrability remains limited; it does not encompass deferring existence/validity or privity questions to the tribunal. Obiter - acknowledgment that interconnected agreement analysis may be a merits question which the referral court may decide on its facts; specific merits were not resolved in the present judgment. Conclusions: The referral court may undertake a limited prima facie review of arbitrability to dispose of plainly non-arbitrable claims, but must not use that limited review as a pretext to avoid a conclusive ruling on the existence and validity of an arbitration agreement or on parties' privity. Issue 3 - Validity of referral order that defers existence/validity to arbitral tribunal Legal framework: Section 11(6A) obliges the referral court to confine itself to the examination of existence of an arbitration agreement; judicial responsibility includes protecting parties from compelled arbitration absent an agreement. Precedent treatment: The Court relies on recent authoritative pronouncements emphasizing the necessity of an arbitration agreement and the limited pre-referral role of courts; previously permitted deference is limited by the statutory amendment. Interpretation and reasoning: Where the referral court's order contains explicit statements that it 'cannot finally pronounce' on existence/validity and leaves determination to the arbitral tribunal, such an order fails to discharge the statutory duty under Section 11(6A). Even if the referral court makes some observations suggesting interconnection of agreements, the presence of express deferential language and a clear leave-over to the tribunal demonstrates that the court did not reach a conclusive determination required by law. Ratio vs. Obiter: Ratio - a referral order that does not conclusively decide existence/validity of the arbitration agreement is inconsistent with Section 11(6A) and must be set aside. Obiter - remarks on how to treat interlinked agreements in principle, while deferring merits to the referral court on remand. Conclusions: A referral order that leaves the fundamental question of existence/validity of an arbitration agreement to the arbitral tribunal is legally infirm and subject to quashing; the appropriate remedy is remittal to the referral court to decide the arbitration petitions afresh and to determine conclusively the existence and validity of the arbitration agreement within a stipulated period. Relief and procedural direction (consequential to conclusions above) The impugned referral is quashed and set aside to the extent it referred disputes to arbitration without a conclusive pre-referral determination of existence/validity of the arbitration agreement. The matter is remitted to the referral court to decide the arbitration petitions afresh, expressly to decide conclusively and finally the issue of existence and validity (including privity/interconnection questions), within a specified limited time; no decision is made on the merits of existence/validity in the present judgment.