Vidya Drolia v DTC: Part II: Interesting Aspects- Contradiction between Patel Engineering & Booz Allen

Para 17-19 of Vidya Drolia v Durga Trading Corporation is the next interesting aspect we take up in this post. We had discussed the nature of an arbitration agreement and its relation to the law of contracts in the previous post on this subject. In this post, we will discuss the contradiction between Booz Allen and Patel Engineering on whether subject-matter arbitrability is to be decided by a court under Section 8 and11.

In Vidya Drolia, the Supreme Court observed:

" When public policy mandates and states that a case or a dispute is non-arbitrable, the court would not allow an application under Section 8 (or even Section 11 as observed supra) even if the parties have agreed upon arbitration as the mechanism for settlement of such disputes." (Para 19, P. 24).

Justice Ramana's opinion also touches on this topic in many places but does not explicitly note the contradiction between the approaches in these judgments (Patel Engineering &  Booz Allen) noted above. So what exactly is the issue?

The issue relates to whether power exercised under Sections 8 and 11 are similar. What turns on this question is the point whether a court hearing a petition under these sections has to decide subject-matter arbitrability.

In Patel Engineering, the SC held that Sections 8 and 11 were complementary in that the judicial authority under Section 8 or 11 has to decide the jurisdictional issues raised before it. This would logically include questions as to arbitrability of the subject-matter as well. In Booz Allen, however, a two-judge Bench of the Supreme Court held that the nature and scope of issues that arise for consideration in a Section 11 application were narrower than those under Section 8. The court held that arbitrability was not to be determined by the court under Section 11. It is this contradiction that the court in Vidya Drolia highlighted and held: 

"We are clearly bound by the dictum of the Constitutional Bench judgment in Patel Engineering Ltd. that the scope and ambit of court’s jurisdiction under Section 8 or 11 of the Arbitration Act is similar." (Para 17, p. 20).

We invite readers to access this post in this blog written almost a decade back where we argued that given the decision of the larger Bench in Patel Engineering, Booz Allen's approach as regards arbitrability question under Section 11 (that the same has to be decided by the arbitrator) was not consistent with Patel Engineering:

"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...

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."

However, this "contradiction" is a virtually an academic issue, given that Sections 8 and 11 have been amended. We will address Vidya Drolia on the implication of these amendments in another post. But we will conclude this post summarising the concluding observations in Vidya Drolia on this question:

• Judicial review and court's jurisdiction u/ss 8 and 11 are identical but extremely limited [Para 96(b)]
• Patel Engineering is no more good law in view of the 2015 and 2019 amendments to the 1996 Act. [96(a)]
• By virtue of separability and competence principles, arbitral tribunal is the "preferred first authority" to decide all aspects of non-arbitrability and courts can have a second look in terms of Sections 34(2)(a)(i), (ii), or (iv) or 34(2)(b)(i) of the 1996 Act. [96(c)]
• But courts can exercise its jurisdiction where the subject-matter of the dispute is "manifestly and ex facie" non-arbitrable. [96(d)].

[Note that Para 96(d) of the court's view confers very limited jurisdiction on the courts in respect of non-existence or invalidity of agreements as well but we did not deal with these aspects in this post.]