Referral Court Has Duty To Conclusively Decide Issue Of ‘Existence & Validity Of Arbitration Agreement’ Raised At Pre-Referral Stage : Supreme Court

The Supreme Court has held that under Section 11(6) of the Arbitration and Conciliation Act, 1996 , when the issue of ‘existence and validity of an arbitration agreement’ is raised at pre-referral stage, then the Court is duty bound to conclusively decide the issue. If the issue regarding ‘existence and validity of an arbitration agreement’ it is left to the Arbitral Tribunal, then it will be contrary to Section 11(6A) of the Arbitration Act. This is to protect the parties from being forced to arbitrate in absence of a valid arbitration agreement.

The Bench comprising of Justice M.R. Shah and Justice C.T. Ravikumar, while adjudicating an appeal filed in Magic Eye Developers Pvt. Ltd. v M/s. Green Edge Infrastructure Pvt. Ltd. & Ors., has observed that the ‘pre-referral’ jurisdiction of Court under Section 11(6) of Arbitration and Conciliation Act, 1996 consists of two inquiries, (i) existence and validity of arbitration agreement; and (ii) non-arbitrability of dispute.

BACKGROUND FACTS

The Appellant and Respondent had entered into Shareholding Agreements and two Memorandum of Understanding (MoU). While the Shareholding Agreement contained Arbitration Clause, the MoU-2 did not contain the same.

The Respondent filed a petition under Section 11 of the Arbitration and Conciliation Amendment Act, 1996 (“Arbitration Act”) before the High Court seeking appointment of an arbitrator in respect of a dispute pertaining to MoU-2. It was contended that MoU-2 is interlinked with Shareholding Agreements and MoU-1, which already contain an arbitration clause, hence the dispute can be referred to arbitration. The Appellant objected to the petition and submitted that the dispute revolved around MoU-2 alone, which does not contain the arbitration clause.

The High Court referred the dispute to arbitration and appointed an Arbitrator. It was held that since the transaction is complex in nature the same should be addressed by the Arbitral Tribunal.

The Appellant filed an appeal before the Supreme Court against the High Court order. It was argued that under Section 11(6) of Arbitration Act, it is the Court that has to examine the existence of an arbitration agreement and this question cannot be left for the Arbitral Tribunal to decide.

SUPREME COURT VERDICT

The Section 11(6) of the Arbitration Act deals with appointment of Arbitrator in matters where the Parties fail to make an appointment. Earlier the Chief Justice of High Court and his/her designates were empowered to appoint an Arbitrator in such cases.

In 2015, Arbitration Act was amended and the words ‘Chief Justice’ were replaced with ‘Supreme Court or High Court’. Section 11(6A) was inserted which reduced the role of Chief Justice of High Court to examination of existence of an arbitration agreement alone.

Section 11(6): Referral Court to determine the issues of existence/validity of arbitration agreement and non-arbitrability of dispute at pre-referral stage

The issue before the Supreme Court Bench was regarding jurisdiction of the referral court at pre-referral stage, when the issue of existence and validity of an arbitration agreement is raised.

The Bench observed that post amendment in 2015, the jurisdiction of the Court under Section 11(6) of the Arbitration Act is confined to examining whether an arbitration agreement exists between the parties – “nothing more, nothing less”. Under Section 11(6A) of the Arbitration Act, referral court is duty bound to consider the dispute/issue with respect to the existence of an Arbitration Agreement.

It was observed that the ‘pre-referral’ jurisdiction of Court under Section 11(6) consists of two inquiries, (i) existence and validity of arbitration agreement; and (ii) non-arbitrability of dispute. It has been observed as under:

“The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant’s privity to the said agreement. The said matter requires a thorough examination by the referral court. The Secondary inquiry that may arise at the reference stage itself is with respect to the non-arbitrability of the dispute. Both are different and distinct. So far as the first issue with respect to the existence and the validity of an arbitration agreement is concerned, as the same goes to the root of the matter, the same has to be to conclusively decided by the referral court at the referral stage itself.”

With respect to non-arbitrability of the dispute, the court at pre-referral stage may prima facie examine the arbitrability of claims. The review at the reference stage is done to sideline the cases where litigation must stop at the first stage.

Leaving the issue of existence and validity of arbitration agreement for the Arbitral Tribunal to decide is violative of Section 11(6A)

The Bench held that the dispute with respect to the existence and validity of an arbitration agreement, when raised at pre-referral stage, must be decided by the referral court conclusively. The issue cannot be left open for arbitral tribunal to decide. The reason is that the issue with respect to the existence and validity of an arbitration agreement goes to the root of the matter.

“We are of the opinion that therefore, if the dispute/issue with respect to the existence and validity of an arbitration agreement is not conclusively and finally decided by the referral court while exercising the pre-referral jurisdiction under Section 11(6) and it is left to the arbitral tribunal, it will be contrary to Section 11(6A) of the Arbitration Act. It is the duty of the referral court to decide the said issue first conclusively to protect the parties from being forced to arbitrate when there does not exist any arbitration agreement and/or when there is no valid arbitration agreement at all”, the Bench ruled.

The Bench set aside the order passed by the High Court and the matter is remitted back to the High Court/referral court to decide the issue of existence and validity of the arbitration agreement conclusively.

Case Title: Magic Eye Developers Pvt. Ltd. v M/s. Green Edge Infrastructure Pvt. Ltd. & Ors.

Citation: 2023 LiveLaw (SC) 444

Counsel for Appellant: Shri Preetesh Kapur (Sr. Adv.)

Counsel for Respondent: Shri Neeraj Kishan Kaul (Sr. Adv.)

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