Source: Supreme Court  

Why in News?

The Supreme Court clarified that, under the Arbitration & Conciliation Act, 1996 (A & C Act), courts at the referral stage should only determine the existence of a valid arbitration agreement and should not delve into complex factual disputes. This decision reinforces the doctrine of competence-competence, stating that detailed factual inquiries are inappropriate at this stage. The case involved a dispute over whether a non-signatory party could be included in arbitration proceedings, emphasizing the Court's stance on limiting preliminary judicial scrutiny. 

• CJI DY Chandrachud and Justices JB Pardiwala and Manoj Misra held in the matter of Cox and Kings v. SAP India Pvt Ltd. 

What was the Background of Cox and Kings v. SAP India Pvt Ltd.? 

• The petitioner is a company registered under the Companies Act, 1956, engaged in providing tourism packages and hospitality services. 
• Respondent No. 1 is also a registered company, providing business software solution services. It is a wholly owned subsidiary of Respondent No. 2, a company incorporated under German law. 
• The petitioner and Respondent No. 1 entered into an SAP Software End User License Agreement & SAP Enterprise Support Schedule on 14th December 2010. 
• In 2015, Respondent No. 1 recommended their 'Hybris Solution' (SAP Hybris Software) to the petitioner, claiming it would be 90% compatible with the petitioner's requirements. 
• The parties entered into three separate agreements for the purchase, customization, and use of the SAP Hybris Software. 
• Issues arose regarding the timely completion and implementation of the SAP Hybris Software project. 
• The petitioner contacted Respondent No. 2 (the German parent company) about the issues faced in the project execution. 
• Despite attempts to resolve the issues, the contract for the SAP Hybris Software project was rescinded on 15th November 2016. 
• Respondent No. 1 issued a notice invoking arbitration on 29th October 2017, for alleged wrongful termination of the contract and non-payment. 
• An arbitral tribunal was constituted to adjudicate the disputes between the parties. 
• The petitioner filed a Statement of Defence and counterclaims for an amount of Rs. 45,99,71,098/-. 
• During the proceedings, the National Company Law Tribunal (NCLT) admitted an insolvency application against the petitioner. 
• The petitioner sent a fresh notice to both respondents on 7th November 2019, invoking arbitration and including Respondent No. 2 in the notice. 
• Upon the respondents' failure to appoint an arbitrator, the petitioner filed the present petition. 

What were the Court’s Observations? 

• The Court noted that the respondents raised several objections against the petition, but none of these objections questioned or denied the existence of the arbitration agreement invoked by the petitioner. 
• The Court held that the requirement of prima facie existence of an arbitration agreement, as stipulated under Section 11 of the Arbitration and Conciliation Act, 1996, was satisfied in this case. 
• The Court emphasized that once the arbitral tribunal is constituted, the respondents will have the opportunity to raise all available legal objections before it. 
• The Court clarified that the arbitral tribunal should first consider and rule on any preliminary objections raised by the respondents. 
• The Court stated that only if the preliminary objections are rejected by the tribunal should it proceed to adjudicate the petitioner's claims. 
• The Court reiterated the principle of minimal judicial interference at the referral stage, leaving complex factual and legal issues for the arbitral tribunal to decide. 
• The Court emphasized the doctrine of competence-competence, allowing the arbitral tribunal to rule on its own jurisdiction and the admissibility of claims. 
• The Court refrained from delving into the merits of the case or deciding on the binding nature of the arbitration agreement on non-signatories at the referral stage. 
• The Court upheld the view that the arbitral tribunal is the preferred first authority to examine questions of arbitrability and jurisdiction. 
• Based on these observations, the Court allowed the petition and appointed a sole arbitrator to adjudicate the dispute. 

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

• Nationality of Arbitrators:  
  • Any person of any nationality can be an arbitrator, unless the parties agree otherwise. 
  • Appointment procedure:  
  • Parties are free to agree on a procedure for appointing arbitrators, subject to subsection (6). 
  • In the absence of an agreement, for a three-arbitrator tribunal, each party appoints one arbitrator, and the two appointed arbitrators select the third (presiding) arbitrator. 
• Role of Arbitral Institutions:  
  • The Supreme Court and High Courts can designate graded arbitral institutions for appointing arbitrators. 
  • In jurisdictions without graded institutions, the Chief Justice of the High Court may maintain a panel of arbitrators. 
  • These arbitrators are deemed to be arbitral institutions and are entitled to fees as specified in the Fourth Schedule. 
• Appointment in case of failure:  
  • If a party fails to appoint an arbitrator within 30 days of receiving a request, or if the two appointed arbitrators fail to agree on the third within 30 days, the appointment is made by the designated arbitral institution. 
  • For international commercial arbitration, the Supreme Court designates the institution; for other arbitrations, the High Court does so. 
• Sole arbitrator appointment:  
  • If parties fail to agree on a sole arbitrator within 30 days, the appointment is made as per subsection (4). 
• Failure to act under agreed procedure:  
  • If a party, the appointed arbitrators, or a designated person/institution fails to perform under the agreed procedure, the court-designated arbitral institution makes the appointment. 
• Disclosure requirements:  
  • Before appointing an arbitrator, the arbitral institution must seek a written disclosure from the prospective arbitrator as per Section 12(1). 
  • The institution must consider any qualifications required by the parties' agreement and the contents of the disclosure. 
• International commercial arbitration:  
  • For sole or third arbitrator appointments in international commercial arbitrations, the designated institution may appoint an arbitrator of a nationality different from the parties. 
• Multiple appointment requests:  
  • If multiple requests are made to different institutions, the one receiving the first request is competent to appoint. 
• Time frame for appointment:  
  • The arbitral institution must dispose of an application for appointment within 30 days of serving notice on the opposite party. 
• Fees determination:  
  • The arbitral institution determines the arbitral tribunal's fees and payment manner, subject to rates in the Fourth Schedule. 
  • This doesn't apply to international commercial arbitrations or where parties have agreed on fee determination as per arbitral institution rules. 
• Non-delegation of judicial power:  
  • The designation of a person or institution by the Supreme Court or High Court is not considered a delegation of judicial power. 

What is the Scope of Section 11 of A& C Act? 

• Courts are not expected to act mechanically when referring disputes to arbitration under Section 11. 
• Courts are obliged to apply their minds to core preliminary issues, within the framework of Section 11(6-A) of the Act. 
• The judicial review at this stage is not intended to usurp the jurisdiction of the Arbitral Tribunal but to streamline the arbitration process. 
• Even when an arbitration agreement exists, courts can decline to refer a dispute to arbitration if it does not correlate to the agreement. 
• The 2015 amendment to the Act restricted the scope of Section 11 to a prima facie determination of whether an arbitration agreement exists. 
• Courts should examine if the agreement contains a clause providing for arbitration pertaining to the disputes that have arisen between the parties. 
• In certain cases, such as insurance contracts, courts can examine the issue of non-arbitrability at the reference stage itself. 
• Courts are not to adopt an absolute "hands off" approach; limited yet effective intervention is permissible to effectuate the arbitration process. 
• The scope of prima facie examination includes determining whether the subject matter of the dispute is arbitrable, but this should be limited to rare occasions. 
• Courts are required to see whether the dispute in question correlates to the arbitration agreement between the parties. 
• Where there is no correlation between the dispute and the arbitration agreement, the reference to arbitration can be rejected, despite the existence of an agreement between the parties. 
• The judicial review under Section 11 does not interfere with the principle of kompetenz-kompetenz and separation of powers between courts and arbitral tribunals. 

What are the Landmark Judgments of Section 11 of A & C Act?  

• DLF Home Developers Limited v. Rajapura Homes Private Limited & Anr. (2021): 
  • This recent judgment expanded the scope of judicial inquiry under Section 11. 
• Duro Felguera, S.A. v. Gangavaram Port Limited (2017): 
  • It is held that the courts should only look into the existence of an arbitration agreement. 
• Oriental Insurance Company Limited v. Narbheram Power and Steel (P) Limited (2018): 
  • Allowed examination of non-arbitrability at the reference stage in insurance contracts. 
• United India Insurance Company Limited and Another v. Hyundai Engineering & Construction Company Limited and Others. (2018): 
  • Similar to Oriental Insurance, allowed examination of non-arbitrability at the reference stage. 
• Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Limited (2019): 
  • Dealt with unstamped documents and their validity for arbitration. 
• PSA Mumbai Investments PTE. Limited v. Board of Trustees of the Jawaharlal Nehru Port Trust and Another (2018): 
  • It was concluded that an arbitration clause in request for qualification documents would not be applicable. 
• Brightstar Telecommunications India Ltd. v. Iworld Digital Solutions Private Ltd. (2018): 
  • Delhi High Court decision that expanded on Duro Felguera, looking beyond mere existence of arbitration agreement. 
• Vidya Drolia and Others v. Durga Trading Corporation (2021): 
  • A significant judgment that clarified the limited scope of judicial review under Sections 8 and 11, while allowing for prima facie examination in certain cases.