Arbitral Tribunal First To Adjudge Non-Arbitrability Of Dispute And Ground Of Res-Judicata, Courts Can Have Second Look After Award: Rajasthan HC

The bench of Justice Nupur Bhati at the Rajasthan High Court accepted an application filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 seeking appointment of an arbitrator and observed that the issue of non-arbitrability of a dispute under an arbitration agreement falls under the domain of the arbitral tribunal in the first instance and the courts have the power to only “second look” after passing of the arbitral award. The Court also opined that the question regarding the claim being barred by res judicata does not arise for consideration in proceedings under Section 11 of the Act, and hence, it also needs to be dealt with by the arbitral tribunal only.

The applicant was one of the three partners in a partnership firm in which the other two partners were his father and his step-brother. The partnership firm was created for the business and property of the proprietorship, “Choudhary Petroleum House” in which the applicant had 45% share in profit and loss. The property of Choudhary Petroleum House was kept as security with the bank for a loan. On account of loan default, the property was auctioned by the bank. After deducting the loan amount from the auction receipts, the bank disbursed the remaining amount to the partnership firm. However, failing to amicably get his 45% share in that amount, the applicant filed the application, before the High Court, for appointment of arbitrator.

It was argued by the counsel for the respondents that the application was not maintainable because firstly, the dispute did not fall within the purview of arbitration under the partnership deed, and secondly, on account of a writ petition on the same cause with same prayers filed by the applicant, the application operated as res-judicata. Hence, since the applicant's claim was ex-facie non-arbitrable, the applicant should be dismissed.

The Court did not agree with the arguments put forth by the respondents. Firstly, the Court referred to the Supreme Court case of Vidya Drolia and Ors. v Durga Trading Corporation (“Vidya Drolia Case”) which gave four-fold principles to determine when a subject matter in an arbitration agreement was not arbitrable. The four-fold principles were:

1. When the matter related to actions in rem.
2. When the matter affected third party or have erga omnes effect.
3. When the matter related to inalienable sovereign and public interest functions of the State.
4. When the matter was expressly or by necessary implications non-arbitrable as per mandatory statutes.

The Court held that since the subject matter at dispute in the present case did not fall in any of these categories, at a very nascent stage, the matter could not be treated as non-arbitrable.

Furthermore, the Court again relied on the Vidya Drolia Case in which it was opined that based on the principle of competence-competence, arbitral tribunal was the first preferred authority to decide the questions of non-arbitrability and the Courts had the power to only second look after the award had been passed. Following this ruling, the Court stated that it refrains itself from indulging in the question of arbitrability of the dispute in hand.

Secondly, on the question of res judicate, the Court referred to the case of Indian Oil Corp. Ltd. v M/S Sps Engineering Ltd. of the Rajasthan High Court which had laid down that the question whether a claim was barred by res judicata or not, did not arise in the proceedings under Section 11 of the Act before the Court, and the same shall be dealt with by the arbitral tribunal only. Relying on this judgment, the Court decided to also reject the argument on res-judicata put forth by the respondents.

Lastly, the Court referred to another Supreme Court case of BSNL and Anr. v Nortel Networks India (P) (Ltd) in which it was held that under the proceedings of Section 11 of the Act, the court could indulge only when ex-facie the application was time-barred and dead or there was no subsisting dispute.

In the background of this analysis, the Court allowed the application filed by the applicant and appointed an arbitrator.

Title: Dilip Kumar v Dharampal Choudhary & Anr. Citation: 2024 LiveLaw (Raj) 195

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