Court While Deciding 'Section 11' Application Seeking Appointment Of Arbitrator Can Consider Whether Dispute Falls Within 'Excepted Clause' : Supreme Court

The Supreme Court held that, at the stage of deciding application for appointment of arbitrator, a Court can consider whether the dispute falls within the excepted clause.

The court observed that the question of jurisdiction and non-­arbitrability can be considered by a Court at the stage of deciding an application under Section 11 of Arbitration and Conciliation Act if the facts are very clear and glaring.

"Parties to the contract are free to agree on applicability of (1) proper law of contract, (2) proper law of arbitration agreement and (3) proper law of the conduct of arbitration. Parties to the contract also may agree for matters excluded from the purview of arbitration", the bench comprising Justices MR Shah and BV Nagarathna observed.

The court observed thus while disposing the appeal filed by Indian Oil Corporation Limited against the order of the High Court of Delhi allowing  Arbitration Petitions by which, in exercise of powers under Section 11(6) of the Arbitration and Conciliation Act, 1996. 

The crux of the contentions raised by the Attorney General KK Venugopal, who represented the IOC in these appeals, was that the parties can agree to have an arbitration clause but also consensually agree that certain specified disputes alone will be the subject of arbitration. In such cases, no arbitration clause would exist in regard to the 'excepted' or 'excluded' disputes and thus such disputes cannot be referred to arbitration invoking Section 11(6). On the other hand, Senior Advocate Ranjith Kumar , who appeared for the respondent-NCCL, contended that at the stage of appointment of the arbitrator, the Court cannot look into whether there has been accord and satisfaction between the parties or into whether a claim is an excepted claim or not?

Perusing the contract between the parties, the bench noted that there are clauses which provides that 'Whether or not a claim sought for arbitration by the contractor is a Notified Claim or any such matter / dispute is specifically excluded from the scope, purview and ambit of arbitration agreement, such matter / dispute shall have to be first decided by the General Manager prior to the arbitral proceeding with or proceeding further with the reference.' Thus, unless there is a decision by the General Manager on whether or not a claim sought to be referred to arbitration by the contractor is a Notified Claim or not, the Arbitrator or Arbitral Tribunal shall have no jurisdiction to entertain such a dispute, the court noted.

The court observed that, in the facts and circumstances of the case, the High Court has not committed any error in observing that aspects with regard to 'accord and satisfaction' of the claims or where there is a serious dispute will have to be left to the Arbitral Tribunal. But, it further said thus:

"We do not agree with the conclusion arrived at by the High Court that after the insertion of Sub­ Section (6­A) in Section 11 of the Arbitration Act, scope of inquiry by the Court in Section 11 petition is confined only to ascertain as to whether or not a binding arbitration agreement exists qua the parties before it, which is relatable to the disputes at hand. We are of the opinion that though the Arbitral Tribunal may have jurisdiction and authority to decide the disputes including the question of jurisdiction and non­arbitrability, the same can also be considered by the Court at the stage of deciding Section 11 application if the facts are very clear and glaring and in view of the specific clauses in the agreement binding between the parties, whether the dispute is non­arbitrable and/or it falls within the excepted clause. Even at the stage of deciding Section 11 application, the Court may prima facie consider even the aspect with regard to 'accord and satisfaction' of the claims."

The court further observed:

"Parties to the contract are free to agree on applicability of (1) proper law of contract, (2) proper law of arbitration agreement and (3) proper law of the conduct of arbitration. Parties to the contract also may agree for matters excluded from the purview of arbitration. As observed by this Court in a catena of decisions, unless the effect of agreement results in performance of an unlawful act, an agreement, which is otherwise legal, cannot be held to be void and is binding between the parties."

The court therefore held that the High Court erred in referring the dispute to arbitration and appointing a sole Arbitrator to adjudicate on the dispute with respect to the claims which as such are held to be not Notified Claims by the General Manager. The court observed:

"In that view of the matter, the High Court has misread and misinterpreted the clauses 9.0.1.0 and 9.0.2.0 and has seriously erred in holding that where there is contestation or the decision rendered by the General Manager leaves scope for argument as to whether the claims alleged by the contractor can be categorized as Notified Claim is best left to the Arbitral Tribunal. The dispute whether the claim is a Notified Claim or not is specifically excluded from the scope, purview and ambit of the arbitration agreement. Therefore, once such a dispute falls within the 'excepted matters', any decision by the General Manager on the issue of Notified Claims cannot be the subject matter of arbitration proceeding"

Case details

Indian Oil Corporation Limited vs NCC Limited | 2022 LiveLaw (SC) 616 | CA 341 OF 2022 | 20 July 2022 | Justices MR Shah and BV Nagarathna

Headnotes

Arbitration and Conciliation Act, 1996 ; Section 11, 11(6A) - Though the Arbitral Tribunal may have jurisdiction and authority to decide the disputes including the question of jurisdiction and non­arbitrability, the same can also be considered by the Court at the stage of deciding Section 11 application if the facts are very clear and glaring and in view of the specific clauses in the agreement binding between the parties, whether the dispute is non­arbitrable and/or it falls within the excepted clause. Even at the stage of deciding Section 11 application, the Court may prima facie consider even the aspect with regard to 'accord and satisfaction' of the claims. (Para 13)

Arbitration and Conciliation Act, 1996 ; Section 11 - Even if an aspect with regard to 'accord and satisfaction' of the claims may/can be considered by the Court at the stage of deciding Section 11 application, it is always advisable and appropriate that in cases of debatable and disputable facts, good reasonably arguable case, the same should be left to the Arbitral Tribunal - Referred to Vidya Drolia v. Durga Trading Corpn. (2021)2 SCC 1. (Para 13)

Arbitration and Conciliation Act, 1996 ; Section 7 - Parties to the contract are free to agree on applicability of (1) proper law of contract, (2) proper law of arbitration agreement and (3) proper law of the conduct of arbitration. Parties to the contract also may agree for matters excluded from the purview of arbitration - Unless the effect of agreement results in performance of an unlawful act, an agreement, which is otherwise legal, cannot be held to be void and is binding between the parties. (Para 13.3)

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