Hyundai Engineering: Revival of the Conundrum Under Section 11 of the Arbitration Act

By: Rajvansh Singh 


INTRODUCTION

In United India Insurance v Hyundai Engineering (hereinafter ‘Hyundai Engineering’), the respondents had filed a petition under Section 11(4) and Section 11(6) of the Arbitration and Conciliation Act 1996 (hereinafter ‘the Act’) before the High Court of Madras. The appellant resisted the petition by claiming that the condition precedent to arbitration as mentioned in Clause 7 was not fulfilled. The clause read as:

It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as herein before provided if the Company has disputed or not accepted liability under or in respect of this Policy.”

The High Court, relying on the judgement delivered in Duro Felguera v Gangavaram, (hereinafter ‘Duro Felguera’), appointed an arbitrator. However, on an appeal made to the Supreme Court (hereinafter ‘SC’), the SC set aside the impugned order of the High Court of Madras. In this post, the author seeks to prove that the SC erred in allowing the appeal to be admitted. This is because; the interpretation of the judgement is contrary to the intention of the legislature behind enacting section 11(6A) of the Act. Further, the author seeks to show that such an interpretation has revived the draconian law which was prevalent under the pre-amendment regime.

REVIEWING THE CONUNDRUM IN PRE-AMENDMENT REGIME

Before the Amendment Act of 2015, the Supreme Court, on several occasions, examined the power of Chief Justice vested under Section 11 and adopted two different opinions:

  • Firstly, in Konkan Railway v Mehul Construction and Shree Ram Mills v Utility Premises, the court was of the view that the term power under section 11 is “administrative in nature”. Furthermore, in Shin Etsu Chemicals v Aksh Optifibre (hereinafter ‘Shin Etsu’) the court was in favour of having a limited judicial interference at the pre-arbitral stage. This implies that the court should only have a prima facie look at the controversy. In other words, the Chief Justice is vested with powers but only to the extent of determining the validity of the arbitration clause on a prima facie
  • Secondly, in S.B.P. v Patel Engineering (hereinafter ‘S.B.P.’), it was held that the power exercised under section 11 is “judicial in nature.” This stand of the SC was further explained in National Insurance v Boghara Polyfab (hereinafter ‘Boghara). S.B.P. coupled with Boghara gave a wide interpretation of the power vested in the hands of the Chief Justice. This position of law was maintained until the Amendment Act was enacted in 2015. The pre-amendment law can be, further, understood from para 18 of Boghara, which reads as:

“the respondent contends that the dispute is not arbitrable on account of discharge of the contract under a settlement agreement or discharge voucher or no-claim certificate, and the claimant contends that it was obtained by fraud, coercion or under influence, the issue will have to be decided either by the Chief Justice/his designate in the proceedings under section 11 of the Act or by the Arbitral Tribunal as directed by the order under section 11 of the Act.”

RESOLVING THE CONUNDRUM

The 246th Law Commission Report highlighted the existing problem pertaining to the judicial intervention under section 11. The Law Commission recommended adopting the rationale behind SC’s ruling in Shin Etsu rendered with respect to section 45.  The legislature acting on the recommendation, with a view to settling the pre-amendment conundrum, enacted Section 11(6A) which reads as follows:

“The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement”.

Section 11(6A) has limited the scope of judicial intervention allowed by S.B.P. and Boghara. This implies that the courts cannot look beyond the question of the existence of an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement. No other objections can be sustained by the courts. As a result, the question of arbitration being the appropriate remedy is for the arbitral tribunal to decide. The same reasoning was upheld by the court in Jumbo Bags v New India Assurance.

However, a small departure from the law commission recommendation is visible. The Law Commission had recommended a ‘prima facie satisfaction’, whereas the Amendment Act, does not expressly define the nature of the intervention, and instead only uses the word ‘examination’. It is suggested that the absence of ‘prima facie’ implies that any order rendered under Section 11 will be final. The arbitral tribunal or other judicial authority would have no power to scrutinise the same.

THE REVIVAL OF THE CONUNDRUM IN POST-AMENDMENT REGIME

In Hyundai Engineering, there was no dispute with respect to the existence of the arbitration clause. The issue in the said case was whether the claims made by the parties were within the scope of the arbitration agreement between the parties. The SC decided to follow the law laid down by the full bench in Vulcan Insurance v Maharaj Singh and further explained by the full bench of Oriental Insurance v Narbheram Power. In both the cases, the SC dealt with a clause similar to clause 7 and held that the arbitration clause should be given a strict interpretation.

The SC was of the opinion that Clause 7 is a conditional expression of intent. Such a clause will be activated only if the precondition attached is fulfilled. In other words, “if a clause stipulates that under certain circumstances there can be no arbitration, and they are demonstrably clear, the controversy pertaining to the appointment of an arbitrator has to be put to rest.” This implies that to kindle the arbitration clause, the insurer shall unequivocally admit its liability.

The provision underlined in Section 11(6A) was examined in detail by the Supreme Court in Duro Felguera, wherein the court put forth that:

  • The purpose behind Section 11(6A) was to reduce the judicial intervention with respect to the appointment of an arbitrator,
  • The intention behind Section 11(6A) should be respected.

 However, the SC refused to abide by Duro Felguera on two grounds:

  • The judgment was given by a division bench and hence not binding on it.
  • The question sought to be adjudicated in Duro Felguera was different from the present case.

This judgement has revived the conundrum prevalent in the pre-amendment regime established by S.B.P. and Boghara. Further, this stand of the SC invalidates the effect that Section 11(6A) had intended to create.

CONCLUSION

The judgment conveniently erodes the intention of legislature behind the Amendment of 2015. However, it is pertinent to note that the Arbitration and Conciliation (Amendment) Bill of 2018 seems to dilute the intervention of the courts as, as per the bill the appointment of the arbitrator will be done by institutions designated by courts.

The author is of the view that the present judgement is bad in law and Section 11(6A) needs to be strictly interpreted, as the same will be in tune with Section 5 of the Act. At this juncture, it is important to mention that Section 5 of the Act is in conformity with Article 5 of UNCITRAL Model Law, which eliminates the scope of judicial intervention except where so, provided.  The SC, in a plethora of judgements, has affirmed the principle of law stated under Section 5. Considering the aforementioned argument, unless Section 11(6A) is declared unconstitutional, the court has no legal mandate to act contrary to the provision.

The law on arbitration is growing tremendously to complement the growing economy of India. In this backdrop, the legislature and judiciary have adopted a pro-arbitration stance by limiting the judicial intervention. It should be noted that leading arbitration jurisdictions such as Hong Kong and Singapore favour minimal court involvement, specifically in the appointment of arbitrators. However, the bias towards arbitration seems to be diluted as the law put forth in United Engineering provides an opportunity for a conniving party to delay the arbitration proceedings by raising several issues like arbitrability even before the appointment of an arbitrator.


(Rajvansh Singh is a 3rd-year student at National Law University, Odisha. He finds his interest in Arbitration Law.)

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