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The Supreme Court has held that there is a need to amend certain provisions in light of the judgment in Vidya Drolia Vs. Durga Trading (2019) 20 SCC 406 in order to increase the ambit of Appealability under Section 37 Arbitration and Conciliation Act, 1996 ("Act").

A Full Judge Bench of Justice R.F. Nariman, Justice B.R. Gavai and Justice Hrishikesh Roy, while considering the dictum laid down in Vidya Drolia v. Durga Trading, (2019) 20 SCC 406, observed, “… in cases decided under Section 8, a refusal to refer parties to arbitration is appealable under Section 37(1)(a), a similar refusal to refer parties to arbitration under Section 11(6) read with Sections 6(A) and 7 is not appealable. In the light of what has been decided in Vidya Drolia, Parliament may need to have a re-look at Section 11(7) and Section 37 so that orders made under Sections 8 and 11 are brought on par qua appealability as well.”

The aforesaid judgment arose out of a reference made in Vidya Drolia v. Durga Trading, (2019) 20 SCC 406. 

Issues for determination in the reference were; (i) Meaning of non-arbitrability and when the subject-matter of the dispute is not capable of being resolved through Arbitration (in terms of Section 11) (ii) The conundrum – “who decides” – Whether the Court at the reference stage or the Arbitral Tribunal in the Arbitration proceedings decide the question of non-arbitrability 

The Bench decided;

(i) “The expression ‘existence of an arbitration agreement’ in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment (Vidya Drolia). In cases of debatable and disputable facts and good reasonable case, etc. the court would force the parties to abide by the arbitration agreement as the Arbitral Tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.

(ii) The general rule, in view of the legislative mandate from Act 3 of 2016 and Act 33 of 2019, principle of severability and kompetenz-kompetenz, is that the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The Court has been conferred power of ‘second look’ on aspects of non-arbitrability, post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act. Rarely as a demurrer the court may interfere at Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable.”

Anomaly between the existing legislation and Vidya Drolia judgment; Parliament enacted the 2015 amendment pursuant to the Law Commission Report. It followed the Scheme of the Law Commission’s Report for Section 8 and Section 37 by enacting the words “… unless it finds that prima facie no valid arbitration agreement exists…” in Section 8(1) and the insertion of sub-clause (a) in Section 37(1) providing an appeal in an order made under Section 8, which refuses to refer parties to arbitration. 

So far as Section 11(6) and Section 11(6A) are concerned, what was recommended by the Law Commission was not incorporated.

Section 11(7) was retained, by which no appeal could be filed under an order made under Section 11(6) read with Section 11(6A), whether the Court’s determination led to a finding that the arbitration agreement existed or did not exist on the facts of a given case. Concomitantly, no amendment was made to Section 37(1), as recommended by the Law Commission.

However, by a process of judicial interpretation, Vidya Drolia has read the ‘prima facie test’ into Section 11(6A) so as to bring the provisions of Sections 8(1) and 11(6) read with 11(6A) on par. 

Considering that Section 11(7) and Section 37 have yet not been amended, an anomaly thus exists.

In the present case, the bench considering the submissions made by Learned Senior Counsel Mr. Divan, set aside the impugned judgment of the High Court, so far as it conclusively finds that there is an Arbitration Agreement between the parties. However, the appointment of retired Justice G.S. Sistani, as the sole arbitrator in the matter, was upheld. 

Given to the striking differences in terms of dates and events, the Bench observed that it is not sufficient to conclude that there is a contract between the parties, which has an arbitration clause.

“The prima facie review spoken in Vidya Drolia can lead to only one conclusion on the facts of this case – that a deeper consideration of whether an arbitration agreement exists between the parties must be left to an Arbitrator who is to examine the documentary evidence produced before him in detail…”, added the Bench. 

Case Title: Pravin Electricals v. Galaxy Infra and Engineering | Civil Appeal No. 825 of 2021

Provisions/Statute Involved: Sections 6,7,8,11,37 Arbitration and Conciliation Act, 1996

Access Copy of Judgment Here