"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Friday, June 3, 2011

Arbitrability, Section 11 and Booz Allen

Last month, the Supreme Court comprehensively dealt with the Arbitrability question in Booz Allen & Hamilton v SBI Home Finance and laid down general principles on Arbitrability. In one of our recent posts, we had mentioned that Booz Allen makes a mention of the issue of the scope of the power of the Chief Justice under Section 11 to decide the question of Arbitrability. In this post, we would that aspect.

Booz Allen deals with the scope of the decision to be taken by the judicial authority pursuant to an application under Section 8 of the Arbitration and Conciliation Act, 1996. The court, while distinguishing between the scope of the power of a court under Section 8 and under Section 11 (the term used in Section 11 is the “Chief Justice” but after Patel Engineering, the distinction between court and the Chief Justice is virtually none), stated that that scope of issues for consideration under Section 8 was wider than that of Section 11 as under the latter, the court did not decide questions pertaining to Arbitrability. The court held:
"While considering an application under section 11 of the Act, the Chief Justice or his designate would not embark upon an examination of the issue of `arbitrability' or appropriateness of adjudication by a private forum, once he finds that there was an arbitration agreement between or among the parties, and would leave the issue of arbitrability for the decision of the arbitral Tribunal."
The court went further and stated that if the tribunal is constituted pursuant to an application under Section 11 and if the tribunal decides that the dispute was arbitrable, the only remedy available to challenge the tribunal’s decision on arbitrabilility is to approach the court under Section 34(2)(b)(i) of the Act.

In one of our earlier posts, we had touched upon this issue in the context of the power of a court under Section 11 to decide on question pertaining to Arbitrability of a claim arising under a contract by an unregistered partnership firm against another party to the contract. Our take on the issue was that the court should. In this post, we explain why.

Rationale of Patel Engineering
Two dominant themes dominate the reasoning in Patel Engineering (1) the jurisdictional facts rationale, (2) credibility.

The court held that when a tribunal (generic usage) intends to exercise jurisdiction, it has to be satisfied of the existence of jurisdictional facts, that is, those facts which are conditions precedent for the exercise of jurisdiction. Since, the existence of an arbitration agreement or its validity was a condition precedent to the exercise of a court’s jurisdiction, the court held that it was a jurisdictional fact and therefore, the court under Section 11 had to decide it.  

Another reason for the decision was that the court’s view that a party would be put to serious monetary pressure if he was dragged to arbitration when there was arbitration no arbitration agreement at all. Therefore, the court held that instead of letting such party to be dragged to arbitration, it would be better if the court itself decided on these questions.

The pertinent question for the purposes of this post would be whether Patel Engineering gives an indication of whether a decision under Section 11 included a decision on issues of Arbitrability. This blawgger’s view is that it would. Two reasons: (1) In line with the Patel Engg approach, Arbitrability of the dispute would be a jurisdictional fact/ condition precedent for the Chief Justice to exercise jurisdiction; (2) Supreme Court’s concern was for the party who had not agreed to an arbitration agreement but had to go through the entire process of arbitration (because the Act did not permit a court to interfere unless provided so in the Act) and could only challenge the award under Section 34. The same situation applies to Arbitrability as well. In a petition under Section 11, if the contention is that the dispute was not arbitrable, and if the court mechanically refers the parties to arbitration, the party which raised such a contention will be unnecessarily put to the trouble of going through the entire arbitration process.

Patel Engineering has even expressly stated that the Arbitrability questions should go the court and not the arbitrator. Following are the relevant portions of the judgement:
"[I]t appears to us that while functioning under Section 11(6) of the Act, a Chief Justice or the person or institution designated by him, is bound to decide whether he has jurisdiction, whether there is an arbitration agreement, whether the applicant before him, is a party, whether the conditions for exercise of the power have been fulfilled and if an arbitrator is to be appointed, who is the fit person, in terms of the provision.”
"The appointment of an arbitrator against the opposition of one of the parties on the ground that the Chief Justice had no jurisdiction or on the ground that there was no arbitration agreement, or on the ground that there was no dispute subsisting which was capable of being arbitrated upon or that the conditions for exercise of power under Section 11(6) of the Act do not exist or that the qualification contemplated for the arbitrator by the parties cannot be ignored and has to be borne in mind, are all adjudications which affect the rights of parties.”

[the above reference may be to any outstanding issue between the contracting parties post-discharge of a contract]
"Dragging a party to an arbitration when there existed no arbitration agreement or when there existed no arbitrable dispute, can certainly affect the right of that party and even on monetary terms, impose on him a serious liability for meeting the expenses of the arbitration, even if it be preliminary expenses and his objection is upheld by the arbitral tribunal.”
Even if it is argued that the above quotes refer to contractual arbitrability and not arbitrability limitations imposed by law, there is no rationale why contractual arbitrability issues need to be treated differently from arbitrability limitations imposed by law. The recent edition of Justice RS Bachawat’s Law of Arbitration and Conciliation notes at p. 747:
The immediate implication of [of the decision in Patel Engineering that the nature of the decision under Section 11 was judicial] is that the court, when asked to appoint an arbitrator, must go into the questions of arbitrability of the claim, validity of the arbitration agreement, and other jurisdictional matters.”
Therefore, this blawgger is of the view that the obiter dicta of the Supreme Court in Booz Allen ought to be placed below the decision of the Seven Bench Supreme Court in Patel Engineering in terms of binding force. 

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