Referral Court Has Duty To Conclusively Decide Issue Of ‘Existence & Validity Of Arbitration Agreement’

Cause Title : Magic Eye Developers Pvt. Ltd. Vs M/s. Green Edge Infrastructure Pvt. Ltd. & Ors., SLP (C) Nos. 18339-42/2021, Supreme Court Of India

Date of Judgment/Order :

Corum :  M.R. Shah & C. T. Ravikumar, J.

Citied: 

1. Vidya Drolia and Ors. Vs. Durga Trading Corporation, (2021) 2 SCC 1
2. N.N. Global Mercantile Private Limited Vs. Indo Unique Flame Ltd. and Ors., 2023 SCC Online SC 495
3. NTPC Ltd. Vs. SPML Infra Ltd., 2023 SCC Online SC 389 (paragraphs 19, 25 and 28)
4. Chloro Controls India Private Limited Vs. Severn Trent Water Purification Inc. and Ors., (2013) 1 SCC 641
5. Olympus Superstructures (P) Ltd. Vs. Meena Vijay Khetan, (1999) 5 SCC 651

Background

The issue was that when dispute arose between litigants, the appellant herein (original respondent) had argued that the final MOU did not contain any arbitral agreement while the respondent herein  (original applicant) the final MOU is interlinked with previous agreements which had arbitral clause.

The original applicant had approached the High Court under Section 11 of the Arbitration Act for appoint of arbitrators. Before the High Court the appellant herein specifically raised an objection with regard to the existence of an arbitration agreement/clause. The High Court deciding that the arbitrability of the dispute is an involved issue and can be addressed by the learned Arbitral Tribunal, referred the disputes for arbitration and appointed the arbitrator. Hence this appeal.

Judgment

The Supreme Court observed that the short question which is posed for the consideration of this Court is, the jurisdiction of the referral court at pre-referral stage when the issue with respect to the existence and validity of an arbitration agreement is raised.

Section 11 refers to the procedure for Appointment of arbitrators and the actions to be taken when parties and/or the arbitrators fail to agree with the procedure/appointments. At this stage the matter is said to be pre-referral.

As per the settled position of law, pre-referral jurisdiction of the court under Section 11(6) of the Arbitration Act is very narrow and inheres two inquiries. The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant’s privity to the said agreement. The Secondary inquiry that may arise at the reference stage itself is with respect to the non-arbitrability of the dispute. Both are different and distinct. 

So far as the non-arbitrability of the dispute is concerned, the court at pre-referral stage and while examining the jurisdiction under Section 11(6) of the Act may even consider prima facie examining the arbitrability of claims. The prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straightforward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage. 

However, so far as the dispute with respect to the existence and validity of an arbitration agreement is concerned and when the same is raised at pre-referral stage, the referral court has to decide the said issue conclusively and finally and should not leave the said issue to be determined by the arbitral tribunal. The reason is that the issue with respect to the existence and validity of an arbitration agreement goes to the root of the matter. Sans an agreement, there cannot be any reference to the arbitration. The intention behind the insertion of Section 11(6A) in the Act was to confine the Court, acting under Section 11, to examine and ascertain about the existence of an arbitration agreement.

Setting aside the order of the High Court, the SC observed that if the dispute/issue with respect to the existence and validity of an arbitration agreement is not conclusively and finally decided by the referral court while exercising the pre-referral jurisdiction under Section 11(6) and it is left to the arbitral tribunal, it will be contrary to Section 11(6A) of the Arbitration Act. It is the duty of the referral court to decide the said issue first conclusively to protect the parties from being forced to arbitrate when there does not exist any arbitration agreement and/or when there is no valid arbitration agreement at all.