Introduction
One of the key objectives of the Arbitration and Conciliation Act, 1996 (Arbitration Act) is expeditious disposal of commercial disputes. However, it is often seen that arbitration is marred by the time spent in courts at the pre-referral stage, especially during the appointment of the arbitral tribunal.
In this background, the Supreme Court in Vidya Drolia v. Durga Trading Corporation (Vidya Drolia Case) held that during pre-referral stage, the question of ‘existence and validity’ of an arbitration agreement would only include a preliminary finding. It was also held that the question of non-arbitrability of a dispute is an evolved question and must be decided by the arbitral tribunal after its constitution. Therefore, it was concluded that while the existence and validity of the arbitration agreement is to be decided by the court, the scope of inquiry is limited and restricted thereby making judicial interference minimal. However, recently, the Supreme Court in Magic Eye Developers Pvt. Ltd. v. Green Edge Infrastructure Pvt. Ltd. & Ors. Etc. (Magic Eye Case) held that the ‘existence and validity’ of an arbitration agreement must be decided conclusively and finally by the referral court itself. In this article, we deal with the decision in Magic Eye Case and its implications that go above and beyond the Vidya Drolia Case.
Understanding powers of the court at pre-referral stage
In Vidya Drolia Case, the Supreme Court recognized that the powers of the court at pre-referral stage is limited to threshold issues. The pre-referral stage includes the following situations:
(i) When parties approach the court for appointment of an arbitrator.
(ii) When parties approach the court for referring the dispute to arbitration.
(iii) In case parties seek interim reliefs before the appointment of an arbitrator.
In situation (i) and (ii), the power of the court is limited to considering: (a) ‘existence and validity’ of an arbitration agreement and (b) whether the dispute is arbitrable. However, in both (a) and (b), the power of the court is limited to a preliminary finding to that extent. In Magic Eye Case, the Supreme Court has added another layer to the powers of the court while deciding ‘existence and validity’ of an arbitration agreement. The Supreme Court has held that such a finding is required to be specific, conclusive and final and should not be left for the arbitral tribunal.
Background
Green Edge Infrastructure Pvt. Ltd. (Green Edge) and Magic Eye Developers Pvt. Ltd. (Magic Eye) entered into two Memorandum of Understanding (MoU-1 and MoU-2 respectively) and two Shareholders Agreement (SHA-1 and SHA-2 respectively). Pursuant to disputes arising under MoU-2, Green Edge approached the Delhi High Court for appointment of an arbitral tribunal. However, Magic Eye raised questions regarding the existence and validity of the arbitration clause. It was contended by Magic Eye that MoU-2 does not contain an arbitration clause and therefore, arbitral tribunal must not be appointed. On the other hand, Green Edge convinced the Delhi High Court that MoU-1, SHA-1 and SHA-2 contain arbitration clauses and are interlinked with MoU-2. Therefore, on this preliminary finding, the Delhi High Court appointed an arbitral tribunal to adjudicate disputes arising under MoU-2.
Aggrieved by the decision of the Delhi High Court, Magic Eye preferred an appeal before the Supreme Court.
Supreme Court’s view
Relying on precedents, the Supreme Court observed that pre-referral jurisdiction of the court includes two inquiries: (i) existence and validity of arbitration agreement and (ii) non-arbitrability of disputes. However, while considering the scope of inquiry under (i) and (ii), the Supreme Court observed that non-arbitrability of disputes requires preliminary finding by the referral court. On the other hand, the question of the existence and validity of an arbitration agreement must be more than preliminary and must be conclusively decided by the referral court. The reasoning adopted in this regard was that since the question of existence and validity goes to the root of the matter, it is essential for the referral court to decide the same conclusively before appointing an arbitral tribunal. In this regard, the Supreme Court placed reliance on the decision in NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Ors. (NN Global decision) to hold that as per section 11(6) of the Arbitration Act, the courts are required to examine the existence and validity of an arbitration agreement.
In the opinion of the Supreme Court, if existence and validity is not conclusively decided, the parties will be forced to arbitrate even in the absence of a valid arbitration agreement.
The Supreme Court observed that the Delhi High Court failed to conclusively adjudicate on the existence and validity of the arbitration agreement. Therefore, the Supreme Court set aside the order and remitted the matter to the Delhi High Court for fresh consideration, directing it to conclusively decide the issue within three months.
Our thoughts
In Vidya Drolia Case, the Supreme Court recognized that the scope of inquiry regarding existence and validity of an arbitration agreement is limited to a preliminary finding. However, in Magic Eye Case, the Supreme Court relying on NN Global decision and Vidya Drolia Case overruled the High Court’s findings and held that the existence and validity of an arbitration agreement must be conclusively decided. It is true that both, the High Court and the Supreme Court, rely upon the Vidya Drolia Case as a precedent to decide the matter. However, owing to the difference in interpretation, Magic Eye Case leaves room for confusion regarding the scope of judicial interference to decide the existence and validity of an arbitration agreement at pre-referral stage.
Additionally, it must be noted that when parties mutually decide an arbitral tribunal, the arbitral tribunal has the power to rule upon the existence and validity of the arbitration agreement. However, merely because the parties fail to agree upon an arbitral tribunal or decide to approach the court for reference or appointment as discussed at (i) and (ii), the arbitral tribunal is stripped of the power to decide the same. In the opinion of the authors, conclusively deciding the question of existence and validity of an arbitration agreement along with appointment of arbitral tribunal is time consuming in as much as it allows the court to go into the merits of the matter. It must be noted that the standard of proof varies while deciding an issue in a preliminary manner as compared to a conclusive finding. Accordingly, the courts spend considerable time in ascertaining the existence and validity of an arbitration agreements thereby leading to substantial delay in appointment of arbitral tribunal. In this background, it cannot be ignored that if questions regarding existence and validity are left for the arbitral tribunal, the courts would not be required to go into the merits of the matter thereby saving time and multiplicity of proceedings.
It appears that pursuant to the NN Global decision (read our thoughts on the judgment here), the judicial trend is leaning towards widened powers of the court at pre-referral stage. By way of its decision in Magic Eye Case, the Supreme Court has essentially allowed courts to decide finally whether an arbitration agreement is valid and in existence. Therefore, if the parties are not satisfied with the decision of the court, they may challenge the decision before the appellate authority until the same is finally decided. At this juncture it must be considered that when the arbitral tribunal decides the issue regarding the existence and validity of an arbitration agreement, the scope of challenge is extremely limited and at the near end of the arbitration. While it may be argued that it is essential to decide the question of existence and validity before proceeding with the arbitration, it must be borne in mind that litigation is time consuming and defeats the very objective of arbitration i.e., speedy and expeditious disposal. Keeping in view the varied perspectives in Vidya Drolia Case, NN Global decision and now Magic Eye Case, the judiciary may need to consider the scope of power of court at pre-referral stage in depth.
Authors: Renjith Nair, Altamash Qureshi and Richa Phulwani
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