To Interfere Or Not To Interfere – The Section 11 Conundrum

Section 11(6A)

When the Parliament enacted the Arbitration and Conciliation (Amendment) Act 2015, the hands of the Court were tied firmly through the insertion of sub-section (6A) to Section 11, which restricted the extent of the Courts' examination to the existence of an arbitration agreement between the parties. Although, the Arbitration and Conciliation (Amendment) Act, 2019, removed sub-section 6A from the Act, its shadow continues to haunt Indian arbitration as the aforesaid amendment is yet to be notified by the executive.

The apex court in Uttarakhand Purv Sainik Kalyan Nigam Limited -vs- Northern Coal Field Limited^[3] affirmed that Section 11(6A) is intended to 'reinforce the kompetenz-kompetenz principle'. It further clarified that all other issues apart from existence of the arbitration agreement should be left to be decided by the arbitrator under Section 16 of the Act.

Later on, in Vidya Drolia and subsequently in BSNL -vs- Nortel, the Supreme Court took it upon itself to untie the Court's hand or somewhat loosen the knot of Section 11(6A). In a subsequent ruling in DLF Home Developers Limited -vs- Rajapura Homes Private Limited & Anr.^[4], the Supreme Court clarified that the Courts, in a Section 11 application, are not expected to act mechanically. Further in M/s Emaar India Ltd. -vs- Tarun Aggarwal Projects LLP & Anr.^[5], the apex court observed that the at the Section 11 stage, the Courts are at least required to hold preliminary inquiry / review and prima facie come to a conclusion as to whether the dispute fell within the scope of the arbitration agreement and whether the same was arbitrable in nature.

Thus, it would be prudent to say that the Supreme Court is palpably smothered by the confinements imposed by Section 11(6A) and have constantly sought to resuscitate itself by expanding the scope of judicial enquiry in a Section 11 application whilst balancing the principles of party autonomy and minimum court intervention.

Vidya Drolia -vs- Durga Trading Corporation

Vidya Drolia is the polestar that provides necessary guidance to Courts’ while considering an application under Section 11. While reiterating that judicial interference should be extremely limited at the stage of a Section 11 application, the Court seemed to divulge from its earlier stance in Uttarakhand Purv Sainik. Whilst the competence-competence principle was given supreme primacy in the aforesaid decision; in Vidya Drolia, the same was not found to be in conflict with a 'limited prima facie review by the Court'. It added that ‘to prevent vexatious matters from being referred to arbitration, which would eventually prevent the wastage of private and public resources, the Court can cull out the weed and cut the deadwood’.

At this juncture, one must understand that the Courts have failed to arrive at a consensus on the extent to which they can undertake an ex-facie review. In our opinion, if this is taken on its literal meaning, it would lead to adverse consequences. Does one expect an aggrieved party to simply plead that a particular claim seems non-arbitrable or that limitation bars it? No party would want to score a self-goal. Therefore, at the referral stage even if the Court can conduct only an ex-facie examination to weed out the frivolous claims, it would still have to conduct some enquiry into the records and evidence put before it to determine if a particular claim falls into the category of deadwood. To put it aptly in the eloquent words of Surya Kant, J. in DLF -vs- Rajapura, the Court, in a Section 11 application, ‘is not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator’ and further held that ‘this exercise is not intended to usurp the tribunal’s jurisdiction but to streamline the arbitration process’.

Therefore, as per Vidya Drolia, limited review does not amount to stepping on the arbitrator's jurisdiction but is rather meant for preserving the integrity, effectiveness, and efficiency of the arbitration process. Yet, it is important to note here that the scope of intervention is extremely restricted and the principle of ‘when in doubt, do refer’ continues to be the guiding tenet.

Outlining Deadwood: Can the Courts decline reference to arbitration on the grounds of limitation?

In the case of Geo Miller -vs- Chairman, Rajasthan Vidyut Utpadan Nigam Ltd.^[6] (subsequently affirmed in BSNL -vs- Nortel), the Supreme Court held that by application of Article 137 of the Limitation Act, the limitation period of three years would begin running from the date on which the cause of action first arose.

On whether the Court can decline a reference on basis of the claim being barred by limitation, the Supreme Court, in Uttarakhand Purv Sainik, held limitation to be a jurisdictional issue, and restricted any scope for judicial interference. Eventually, in BSNL -vs- Nortel, limitation was held to be an issue concerning the admissibility of the claims, and judicial interference within a limited purview was permitted. With the scope for judicial interference, at the Section 11 referral stage, being expanded on the basis of limitation, an argument began to emerge that the conduct of parties would influence the period of limitation and the Courts must take into consideration the exchange of communication between the parties including rejection of the claim by the other side. While in Geo Miller, while the Court excluded the period of negotiation between the parties from calculating the period of limitation, it also made it apparent in BSNL -vs- Nortel and Secundarabad Cantonment Board -vs- B. Ramachandraiah & Sons^[7], that mere exchange of letters would not extend the said period for invoking arbitration.

The principles to be culled out from the aforesaid judicial pronouncements is that in those matters where it is manifest on the face that limitation bars a claim, the Courts are permitted to exercise their discretion in refusing arbitral reference.

Conflicting High Court decisions

Even though the Supreme Court has attempted to delineate uniform jurisprudence on judicial interference under Section 11 where claims are barred by limitation, the implementation, which mostly lies with High Courts, has not been uniform.

On one hand, the High Courts' reluctance can be observed to exercise their judicial discretion even when the case calls for such intervention. The decision of the Andhra Pradesh High Court in SV Choudhary -vs- V Vidya Sagar^[8] is a prominent example of such reluctance. Relying on the principles laid down by the apex court in Vidya Drolia, the Court concluded that the only thing that needed to be looked into was the ‘existence’ and ‘validity’ of the arbitration agreement, and, therefore, referred the matter to arbitration. Surprisingly, the Court skirted the limitation question entirely while acknowledging that the claims can be investigated on the aforesaid ground in light of BSNL -vs- Nortel. In order to determine whether the claims are barred by limitation, some High Courts have tried to fill up the lacuna by devising their own jurisprudence, like the Bombay High Court in TLG–vs- Rebel^[9] restricted prima facie examination to ‘admitted facts’ only. It also outlined that only in cases where the application is ‘hopelessly’ time-barred can the Courts decline a reference under Section 11.

On the other hand, the Calcutta High Court in B.K. Consortium Engineers Private Limited -vs- Indian Institute of Management^[10] held that the arbitrability element is crucial for a Section 11 application to survive. Further holding that the principle of selective and limited interference applies in such cases and not that of complete non-interference, it held that the Courts should not hesitate to decline reference as a party's right to invoke arbitration would extinguish beyond the statutorily prescribed limitation period. Similarly, the Delhi High Court in Extramarks Education -vs- Shri Ram School and Ors.^[11] held that since arbitration is not a legal right but a remedy, parties cannot extend the limitation period even through consent. The principle here is that limitation bars a legal remedy and not a legal right. So, if the claims made are ex-facie time-barred, it would call upon the Courts to decline reference. In the aforesaid judgments, these Courts did not restrain themselves from delving into facts in order to determine the ‘starting point’ of the limitation period, and, thereby, to conclude if the claims are time-barred.

A perusal of High Court judgments show that considering the principles laid down by the Supreme Court, some form of judicial interference is accepted and exercised by the High Courts. However, the limitation is an issue some High Courts skirt and refer to the arbitrator. The Courts must undertake a preliminary enquiry and attempt to determine the date on which the right to sue first accrued or the cause of action first arose and compute the limitation period in cases where an opposition on these grounds has been raised. Only when it cannot be ascertained when the cause of action or the right to sue first accrued, the claims can be referred to the arbitral tribunal. After all, the principle of ‘when in doubt, do refer’ is applicable for such situations.

While the Courts are correct in holding that the arbitrator’s jurisdiction cannot be usurped, sending claims that, based on facts, are ex-facie time-barred leads to inefficiency and over-clogging of the arbitration process, thereby leading to inordinate delays. This goes against the very spirit of time-bound resolution that arbitration stands for. The parties cannot keep flogging a dead horse to make it appear lifelike. To reiterate, adjudicating claims on merits differs entirely from adjudicating their admissibility.

In essence, the limitation is not a wall preventing access to justice, but it is instead a safeguard to ensure the efficiency of the process while preserving its effectiveness. Therefore, in order to streamline the arbitration process and ensure its viability as a dispute resolution mechanism, the Courts must act within their limited capacity and cut the chaff from the grain.

The Anirudh Goyal is an Advocate at Calcutta High Court, and Jaspreet Singh is a student at W.B. National University of Juridical Sciences, Kolkata. Views are personal.