Source: Andhra Pradesh High Court

Why in the News?

In recently case Andhra Pradesh High Court stated that to validate an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (A& C Act), the applicant must demonstrate that the respondents did not comply with the stipulated requirements in the arbitration clause and failed to refer the disputes to the Arbitrator despite being served a notice activating the arbitration clause.

What was the Background under of M/s Shree Swaminarayan Travels vs M/s Oil Natural Gas Corporation Limited (ONGC) Case?

• ONGC issued a tender for hiring eight 25-seater AC shift buses for 24-hour duty over four years.
• The Petitioner secured the contract and entered an agreement on 08.04.2019.
• Disputes arose, with ONGC seeking recovery of Rs. 65,61,300/- from subsequent bills.
• Petitioner requested resolution via Outside Expert Committee (OEC) but received no response.
• Petitioner approached the Andhra Pradesh High Court under Section 11(6) of the A&C Act.
• Respondents argued for adjudication through arbitration as per agreement.
• The High Court ruled that Section 11 application requires prior arbitration notice.
• Absence of notice per agreement's clause 27.1.3 and A&C Act's Section 21 led to dismissal of the application.

What were the Court’s Observations?

• The court observed that Clause 27.1 of the contract specifies that arbitration can only be initiated after a 60-day period following the issuance of a Dispute Notice as mandated in the agreement.
• Clause 27.3 outlines the dispute resolution procedure, requiring a written Dispute Notice to be tendered by either party to the opposing party's identified officer. Both parties must endeavor to achieve an amicable resolution within the designated 60-day period while maintaining confidentiality.
• Further Court observed that despite the Petitioner's apparent attempt to resolve disputes through conciliation by an OEC, no formal notice invoking the arbitration clause was served upon the Respondents after the 60-day period lapsed.
• The High Court referred to Section 11(6) of the A&C Act, granting parties the right to apply for dispute reference to an arbitrator if the other party fails to follow the prescribed procedure.
• Court stated that to sustain an application under Section 11(6), the Petitioner was required to demonstrate that the Respondents failed to comply with the clause and did not refer the disputes to the arbitrator after receiving a notice invoking the arbitration clause.
• Also, the High Court ruled that initiating an application under Section 11 of the A& C Act is only permissible after serving a notice of arbitration regarding the claims designated for arbitration.
• However, due to the absence of any notice served upon the Respondents in accordance with clause 27.1.3 of the agreement and Section 21 of the A&C Act, the High Court concluded that the disputes cannot be referred to an independent arbitrator for adjudication.

What is Section 11 of the Arbitration and Conciliation Act, 1996?

• Section 11 of the A&C Act, has undergone various interpretations and amendments in recent years.
• Indian courts traditionally held that the scope of inquiry under section 11 was confined to determining the existence of an arbitration agreement.
• The judiciary's role under section 11 was limited to preliminarily identifying the arbitration agreement and the dispute, without delving into the details of the dispute.
• An application under section 11 constrained the court's involvement to assessing:
  • Whether a valid arbitration agreement exists between the parties, and
  • If any dispute arising from such an agreement necessitates the appointment of an arbitrator.
• However, recent court decisions have seen a departure from this established principle. Courts now not only identify the arbitration agreement but also scrutinize and determine related prima facie questions.

What is Framework of Section 11 of the Arbitration and Conciliation Act, 1996?

• Section 11 of the Act addresses the appointment of arbitrators in arbitration proceedings.
• It offers options for parties to agree upon an appointment procedure for arbitrators.
• If parties cannot agree on arbitrator appointments, Section 11 enables them to approach the Hon’ble Supreme Court or the Hon’ble High Court for such appointments through sub-sections (4), (5), and (6).
• Amendments to Section 11 have been introduced through the Arbitration & Conciliation (Amendment) Act, 2015 (“2015 Amendment”) and the Arbitration & Conciliation (Amendment) Act, 2019 (“2019 Amendment”).
• The 2015 Amendment added sub-section 6A to Section 11, limiting the court's examination to the ‘existence’ of an arbitration agreement only.
• The 2019 Amendment transferred the power of appointing arbitrators from courts to arbitral institutions designated by the Supreme Court or the High Court, although this amendment is not yet effective.

What are the Major Amendments Related to Section 11 of the Arbitration and Conciliation Act, 1996?

• Amendment 2015
  • The appointment of arbitrators will now be conducted by the Supreme Court or the High Court, depending on the nature of the case, rather than by the Chief Justice of India or the Chief Justice of the High Court.
  • Applications for the appointment of arbitrator(s) will be handled promptly, with efforts made to resolve them within a sixty-day period from the date of service of notice to the opposing party.
  • The High Court has been granted the authority to establish rules for determining the fees of the arbitral tribunal and the manner of such payment. These rules must consider the fee rates outlined in the Fourth Schedule to the Act.
• Amendment 2019
  • The 2019 Amendment Act was enacted by Parliament based on recommendations from the High-Level Committee's report.
  • Key amendments include:
    • Establishment of the independent and autonomous "Arbitration Council of India".
    • Amendment to Section 11 of the Act, particularly focusing on the "Appointment of Arbitrators".
  • Sub-sections (6-A) and (7) were repealed through this amendment.
  • The amended Section 11(6) of the ACA now mandates that arbitrators be appointed by the designated arbitral institution.
  • The appointment process is based on an application by the party and is carried out by the arbitral institution designated by either the Supreme Court for international commercial arbitration or the High Court for arbitrations other than international commercial arbitration.

What are the Landmark Case Laws under the Arbitration and Conciliation Act, 1996?

• In both, Oriental Insurance Company Ltd. v. Narbheram Power and Steel Private Ltd. and United India Insurance Co.Ltd. v. Hyundai Engineering And Construction (2018) the Supreme Court other than identifying the existence of the arbitration agreement, examined whether the conditions stipulated in the contract to give effect to the arbitration agreement have been fulfilled.
• In Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd.(2018) the Supreme Court was of the opinion that an application under Section 11 could be decided only if the arbitration clause or the contract containing the arbitration clause is sufficiently stamped. Considering sub-section (6-A) one could argue that examining the existence of an arbitration agreement does not include examining whether such agreement is sufficiently stamped.