VIDYA DROLIA & Ors. v. DURGA TRADING CORPORATION

Judgment

Judgment in rem and judgment in personam – Distinction between – Discussed. Words and Phrases: ‘Agreement’ – Meaning of. ‘Arbitration agreement’ – Meaning of. ‘Legal relationship’ – Meaning of. ‘Arbitration agreement in writing’ – Meaning of. ‘Existence’ – Meaning of. ‘Examination’ – Meaning of. ‘Existence of an arbitration agreement’ – Meaning of. ‘Arbitrability’ – Meaning of. ‘Prima facie’ – Meaning of. A B C D Answering the referred questions and disposing of the appeal and the SLPs, the Court HELD: Per SANJIV KHANNA, J. (for himself and KRISHNA E MURARI, J.):

1.1 Arbitration is a private dispute resolution mechanism whereby two or more parties agree to resolve their current or future disputes by an arbitral tribunal, as an alternative to adjudication by the courts or a public forum established by law. Parties by mutual agreement forgo their right in law to have their disputes adjudicated in the courts/public forum. Arbitration agreement gives contractual authority to the arbitral tribunal to adjudicate the disputes and bind the parties. [Para 10][1047-G- H]

1.2 The expression ‘arbitration agreement’ has been defined in clause (b) of sub-section (1) of s. 2 of Arbitration and Conciliation Act, 1996 (Arbitration Act) to mean an agreement as defined in Section 7 of the Arbitration Act. The term ‘agreement’ is not defined in the Arbitration Act, albeit it is defined F G H 1004 SUPREME COURT REPORTS [2020] 11 S.C.R. in Section 10 of the Contract Act, 1872 (‘Contract Act’), as contracts made by free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not thereby expressly declared to be void. An arbitration agreement should satisfy the mandate of Section 10 of the Contract Act, in addition to satisfying other requirements stipulated in the Section 7 of the Arbitration Act. [Paras 10 and 11][1048-A-H; 1049-A-B]

1.3 Section 28 of the Contract Act states that agreements in restraint of legal proceedings are void, but Explanation (1) specifically saves contracts by which two or more persons agree that any dispute, or one which may arise between them, in respect of any subject or class of subjects shall be referred to arbitration. Arbitration agreement must satisfy the objective mandates of the law of contract to qualify as an agreement. Clauses (g) and (h) of Section 2 of the Contract Act state that an agreement not enforceable in law is void and an agreement enforceable in law is a contract. As a sequitur, it follows that an arbitration agreement that is not enforceable in law is void and not legally valid. [Para 11][1049-D-E]

1.4 Sub-section (1) to Section 7 of Arbitration Act ordains that the arbitration agreement should be in respect of disputes arising from a defined legal relationship, whether contractual or not. The expression ‘legal relationship’, again not defined in the Arbitration Act, means a relationship which gives rise to legal obligations and duties and, therefore, confers a right. These rights may be contractual or even non-contractual. Non-contractual disputes would require a separate or submission arbitration agreement based on the cause of action arising in tort, restitution, breach of statutory duty or some other non-contractual cause of action. [Para 12][1049-F-G; 1050-A] Russell on Arbitration, 24th Edition # 2-004 – referred to.

1.5 Sub-section (2) to Section 7 states that an arbitration clause may be in the form of a separate agreement or form a part of the underlying or another contract. Clause (3) of Section 7 of the Arbitration Act states that the arbitration agreement shall be A B C D E F G H VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION 1005 in writing, that is, the agreement should be evidenced in writing. By clause (4) the term ‘arbitration agreement in writing’ would include any agreement by exchange of letters, telegrams, electronic mails or communications which provide a record of the agreement or exchange of statements of claim and defence in which one party claims the existence of the agreement and the other party does not deny it. Sub-section (5) to Section 7 states that reference in a contract to a document containing an arbitration clause would constitute a valid arbitration agreement if the contract is in writing and reference is made to the arbitration clause that forms a part of the contract. [Para 13][1050-B-D]

1.6 Questions as to the existence of an arbitration agreement also arise when a party opposing the reference raises plea of novation of contract by entering into a new contract in substitution of the original or ‘accord and satisfaction’ by acceptance of modified obligations in discharge of the contract by performance or simple termination by express or implied consent. Similar plea of discharge can be raised opposing an application for reference on the ground that the claim is long barred and dead or there are no outstanding disputes as the parties have accepted part performance or have absolved the other side from performance, fully or partly, on account of frustration or otherwise. The contention being that once the original contract stands extinguished, abandoned, repudiated or substituted, the arbitration clause in the underlying/original contract perishes with it. [Para 14][1050-D-F]

1.7 Arbitration being a matter of contract, the parties are entitled to fix boundaries as to confer and limit the jurisdiction and legal authority of the arbitrator. An arbitration agreement can be comprehensive and broad to include any dispute or could be confined to specific disputes. The issue of scope of arbitrator’s jurisdiction invariably arises when the disputes that are arbitrable are enumerated or the arbitration agreement provides for exclusions as in case of ‘excepted matters’. The arbitration agreement may be valid, but the arbitral tribunal in view of the will of the parties expressed in the arbitration agreement, may A B C D E F G H 1006 SUPREME COURT REPORTS [2020] 11 S.C.R. not have jurisdiction to adjudicate the dispute. The will of the parties as to the scope of arbitration is a subjective act and personal to the parties. [Para 15][1050-G-H; 1051-A]

1.8 A judgment is a formal expression of conclusive adjudication of the rights and liabilities of the parties. The judgment may operate in two ways, in rem or in personam. A judgment in rem determines the status of a person or thing as distinct from the particular interest in it of a party to the litigation; and such a judgment is conclusive evidence for and against all persons whether parties, privies or strangers of the matter actually decided. Such a judgment “settles the destiny of the res itself” and binds all persons claiming an interest in the property inconsistent with the judgment even though pronounced in their absence. By contrast, a judgment in personam, “although it may concern a res, merely determines the rights of the litigants inter se to the res”. Distinction between judgments in rem and judgments in personam turns on their power as res judicata, i.e. judgment in rem would operate as res judicata against the world, and judgment in personam would operate as res judicata only against the parties in dispute. Use of expressions “rights in rem” and “rights in personam” may not be correct for determining non- arbitrability because of the inter-play between rights in rem and rights in personam. Many a times, a right in rem results in an enforceable right in personam. [Para 30][1061-D-E; 1062-B-E] G.C.Cheshire and P.M North, Private International Law by North and Fawcett (London:Butterworth’s) 1992 – referred to.

1.9 Arbitration by necessary implication excludes actions in rem. Exclusion of actions in rem from arbitration, exposits the intrinsic limits of arbitration as a private dispute resolution mechanism, which is only binding on ‘the parties’ to the arbitration agreement. The courts established by law on the other hand enjoy jurisdiction by default and do not require mutual agreement for conferring jurisdiction. The arbitral tribunals not being courts of law or established under the auspices of the State cannot act judicially so as to affect those who are not bound by the arbitration A B C D E F G H VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION 1007 clause. Arbitration is unsuitable when it has erga omnes effect, that is, it affects the rights and liabilities of persons who are not bound by the arbitration agreement. Equally arbitration as a decentralized mode of dispute resolution is unsuitable when the subject matter or a dispute in the factual background, requires collective adjudication before one court or forum. Certain disputes as a class, or sometimes the dispute in the given facts, can be efficiently resolved only through collective litigation proceedings. Contractual and consensual nature of arbitration underpins its ambit and scope. Authority and power being derived from an agreement cannot bind and is non-effective against non- signatories. An arbitration agreement between two or more parties would be limpid and inexpedient in situations when the subject matter or dispute affects the rights and interests of third parties or without presence of others, an effective and enforceable award is not possible. Prime objective of arbitration to secure just, fair and effective resolution of disputes, without unnecessary delay and with least expense, is crippled and mutilated when the rights and liabilities of persons who have not consented to arbitration are affected or the collective resolution of the disputes by including non-parties is required. Arbitration agreement as an alternative to public fora should not be enforced when it is futile, ineffective, and would be a no result exercise. [Para 31][1062-G; 1063-A-E] Prof. Stavros Brekoulakis – ‘On Arbitrability: Persisting Misconceptions and New Areas of Concern’ – referred to.

1.10 Sovereign functions of the State being inalienable and non-delegable are non-arbitrable as the State alone has the exclusive right and duty to perform such functions. Correctness and validity of the State or sovereign functions cannot be made a direct subject matter of a private adjudicatory process. Sovereign functions for the purpose of Arbitration Act would extend to exercise of executive power in different fields including commerce and economic, legislation in all forms, taxation, eminent domain and police powers which includes maintenance of law and order, internal security, grant of pardon etc., as distinguished from A B C D E F G H 1008 SUPREME COURT REPORTS [2020] 11 S.C.R. commercial activities, economic adventures and welfare activities. Similarly, decisions and adjudicatory functions of the State that have public interest element like the legitimacy of marriage, citizenship, winding up of companies, grant of patents, etc. are non-arbitrable, unless the statute in relation to a regulatory or adjudicatory mechanism either expressly or by clear implication permits arbitration. In these matters the State enjoys monopoly in dispute resolution. [Para 32][1063-F-G; 1064-A-B] Common Cause v. Union of India, (1999) 6 SCC 667: [1999] 3 SCR 1279 ; Agricultural Produce Market Committee v. Ashok Harikuni & Another (2000) 8 SCC 61: [2000] 3 Suppl. SCR 379 – relied on. Ajar Raib – Defining Contours of the Public Policy Exception – A New Test for Arbitrability – referred to.

1.11 Implied legislative intention to exclude arbitration can be seen if it appears that the statute creates a special right or a liability and provides for determination of the right and liability to be dealt with by the specified courts or the tribunals specially constituted in that behalf and further lays down that all questions about the said right and liability shall be determined by the court or tribunals so empowered and vested with exclusive jurisdiction. Therefore, mere creation of a specific forum as a substitute for civil court or specifying the civil court, may not be enough to accept the inference of implicit non-arbitrability. Conferment of jurisdiction on a specific court or creation of a public forum though eminently significant, may not be the decisive test to answer and decide whether arbitrability is impliedly barred. Implicit non- arbitrability is established when by mandatory law the parties are quintessentially barred from contracting out and waiving the adjudication by the designated court or the specified public forum. There is no choice. The person who insists on the remedy must seek his remedy before the forum stated in the statute and before no other forum. [Paras 33 and 34][1065-C-F] Dhulabhai Etc. v. State of Madhya Pradesh and Another [1968] 3 SCR 662 – relied on. A B C D E F G H VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION 1009 Wolverhampton New Waterworks Co. v. Hawkesford 9 [1859] 6 C.B. (NS) 336 – referred to.

1.12 Doctrine of election to select arbitration as a dispute resolution mechanism by mutual agreement is available only if the law accepts existence of arbitration as an alternative remedy and freedom to choose is available. There should not be any inconsistency or repugnancy between the provisions of the mandatory law and arbitration as an alternative. Conversely and in a given case when there is repugnancy and inconsistency, the right of choice and election to arbitrate is denied. This requires examining the “text of the statute, the legislative history, and ‘inherent conflict’ between arbitration and the statute’s underlying purpose” with reference to the nature and type of special rights conferred and power and authority given to the courts or public forum to effectuate and enforce these rights and the orders passed. When arbitration cannot enforce and apply such rights or the award cannot be implemented and enforced in the manner as provided and mandated by law, the right of election to choose arbitration in preference to the courts or public forum is either completely denied or could be curtailed. In essence, it is necessary to examine if the statute creates a special right or liability and provides for the determination of each right or liability by the specified court or the public forum so constituted, and whether the remedies beyond the ordinary domain of the civil courts are prescribed. When the answer is affirmative, arbitration in the absence of special reason is contraindicated. The dispute is non-arbitrable. [Para 34][1066-E-H; 1067-A-B] Transcore v. Union of India and Another (2008) 1 SCC 125:[2006] 9 Suppl. SCR 785; M.D. Frozen Foods Exports Private Limited and Others v. Hero Fincorp Limited (2017) 16 SCC 741: [2017] 13 SCR 800; Indiabulls Housing Finance Limited v. Deccan Chronicle Holdings Limited and Others (2018) 14 SCC 783: [2018] 1 SCR 1096 – relied on. HDFC Bank Ltd. v. Satpal Singh Bakshi, 2013 (134) DRJ 566 (FB) – overruled A B C D E F G H 1010 SUPREME COURT REPORTS [2020] 11 S.C.R. Jennifer L. Peresie, Reducing the Presumption of Arbitrability – referred to.

1.13 Section 34(2)(b) of the Arbitration Act consists of two sub-clauses both accrediting the court with the power to set aside an award. Under sub-clause (i) an award is liable to be set aside when the subject matter is not capable of settlement by arbitration under law for the time being in force. Under sub-clause (ii) an award can be set aside if it is in conflict with the public policy of India. As per Explanation No. 1, an award is in conflict with the public policy of India only if it was induced or affected by fraud, corruption, etc. or it is in contravention with the fundamental policy of Indian law or is in conflict with the most basic notions of morality or justice. Explanation 2 cautions the courts not to review on the merits of the case while examining the question whether an award is in contravention with the fundamental policy of law. Therefore, conflict with the public policy of India and a subject matter of dispute not capable of settlement by arbitration, are two separate and independent grounds on which the court can set aside the award. [Para 39][1072-B-D]

1.14 Public policy in the context of non-arbitrability refers to public policy as reflected in the enactment, that is, whether the enactment confers exclusive jurisdiction to the specified court or the special forum and prohibits recourse to arbitration. Public policy in the context of sub-clause(ii) to Section 34(2)(b) refers to the public policy of the enactment, defining and fixing rights and obligations, and application of those rights and obligations by the arbitrator. Statutes unfailingly have a public purpose or policy which is the basis and purpose behind the legislation. Application of mandatory law to the merits of the case do not imply that the right to arbitrate is taken away. Mandatory law may require a particular substantive rule to be applied, but this would not preclude arbitration. Implied non-arbitrability requires prohibition against waiver of jurisdiction, which happens when a statute gives special rights or obligations and creates or stipulates an exclusive forum for adjudication and enforcement. An arbitrator, like the court, is equally bound by the public policy behind the statute while examining the claim on merits. The public A B C D E F G H VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION 1011 policy in case of non-arbitrability would relate to conferment of exclusive jurisdiction on the court or the special forum set up by law for decision making. Non-arbitrability question cannot be answered by examining whether the statute has a public policy objective which invariably every statue would have. There is a general presumption in favour of arbitrability, which is not excluded simply because the dispute is permeated by applicability of mandatory law. Violation of public policy by the arbitrator could well result in setting aside the award on the ground of failure to follow the fundamental policy of law in India, but not on the ground that the subject matter of the dispute was non-arbitrable. [Para 39][1072-E-H; 1073-A-B]

1.15 It would be grossly irrational and completely wrong to mistrust and treat arbitration as flawed and inferior adjudication procedure unfit to deal with the public policy aspects of a legislation. Arbitrators, like the courts, are equally bound to resolve and decide disputes in accordance with the public policy of the law. Possibility of failure to abide by public policy consideration in a legislation, which otherwise does not expressly or by necessary implication exclude arbitration, cannot form the basis to overwrite and nullify the arbitration agreement. This would be contrary to and defeat the legislative intent reflected in the public policy objective behind the Arbitration Act. Arbitration has considerable advantages as it gives freedom to the parties to choose an arbitrator of their choice, and it is informal, flexible and quick. Simplicity, informality and expedition are hallmarks of arbitration. Arbitrators are required to be impartial and independent, adhere to natural justice, and follow a fair and just procedure. Arbitrators are normally experts in the subject and perform their tasks by referring to facts, evidence, and relevant case law. Complexity is not sufficient to ward off arbitration. In terms of the mandate of Section 89 of the Civil Procedure Code and the object and purpose behind the Arbitration Act and the mandatory language of Sections 8 and 11, the mutually agreed arbitration clauses must be enforced. The language of Sections 8 and 11 of the Arbitration Act are peremptory in nature. Arbitration Act has been enacted to promote arbitration as a transparent, A B C D E F G H 1012 SUPREME COURT REPORTS [2020] 11 S.C.R. A B C D E F G H fair, and just alternative to court adjudication. Public policy is to encourage and strengthen arbitration to resolve and settle economic, commercial and civil disputes. Amendments from time to time have addressed the issues and corrected the inadequacies and flaws in the arbitration procedure. It is for the stakeholders, including the arbitrators, to assure that the arbitration is as impartial, just, and fair as court adjudication. It is also the duty of the courts at the post-award stage to selectively yet effectively exercise the limited jurisdiction, within the four corners of Section 34(2)(b)(ii) read with Explanation 1 and 2 and check any conflict with the fundamental policy of the applicable law. [Para 41][1074- A-G]

1.16 A four-fold test for determining when the subject matter of a dispute in an arbitration agreement is not arbitrable is (1) when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem. (2) when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable. (3) When cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; (4) When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s). These tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will help and assist in determining and ascertaining with great degree of certainty when as per law in India, a dispute or subject matter is non-arbitrable. Only when the answer is affirmative that the subject matter of the dispute would be non-arbitrable. However, the aforesaid principles have to be applied with care and caution. [Para 45][1077- A-E]

1.17 Applying the above principles to determine non- arbitrability, it is apparent that insolvency or intra-company disputes have to be addressed by a centralized forum, be the court or a special forum, which would be more efficient and has complete jurisdiction to efficaciously and fully dispose of the entire matter. They are also actions in rem. Similarly, grant and issue of VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION 1013 patents and registration of trademarks are exclusive matters falling within the sovereign or government functions and have erga omnes effect. Such grants confer monopoly rights. They are non-arbitrable. Criminal cases again are not arbitrable as they relate to sovereign functions of the State. Further, violations of criminal law are offenses against the State and not just against the victim. Matrimonial disputes relating to the dissolution of marriage, restitution of conjugal rights etc. are not arbitrable as they fall within the ambit of sovereign functions and do not have any commercial and economic value. The decisions have erga omnes effect. Matters relating to probate, testamentary matter etc. are actions in rem and are a declaration to the world at large and hence are non-arbitrable. [Para 46][1077-G-H; 1078-A-C]

1.18 Landlord-tenant disputes governed by the Transfer of Property Act are arbitrable as they are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. Such actions normally would not affect third-party rights or have erga omnes affect or require centralized adjudication. An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court. Landlord-tenant disputes do not relate to inalienable and sovereign functions of the State. The provisions of the Transfer of Property Act do not expressly or by necessary implication bar arbitration. Transfer of Property Act, like all other Acts, has a public purpose, that is, to regulate landlord-tenant relationships and the arbitrator would be bound by the provisions, including provisions which enure and protect the tenants. Therefore landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration. However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration. [Paras 48 and 49][1078-E-H; 1079-A-B] Chloro Controls India Private Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641: [2012] 13 A B C D E F G H 1014 SUPREME COURT REPORTS [2020] 11 S.C.R. SCR 402; Natraj Studios (P) Ltd. v. Navrang Studios (1981) 1 SCC 523: [1981] 2 SCR 466; Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC 532; Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan and Others (1999) 5 SCC 651: [1999] 3 SCR 490; Vimal Kishor Shah and Others v. Jayesh Dinesh Shah and Other (2016) 8 SCC 788: [2016] 7 SCR 102 ; Emaar MGF Land Limited v. Aftab Singh (2019) 12 SCC 751:[2018] 14 SCR 791; A. Avyasamy v. A. Paramasivam and Others (2016) 10 SCC 386 : [2016] 11 SCR 521; Premier Automobiles Ltd. v. Kamlekar Shantaram Wadke of Bombay and Others (1976) 1 SCC 496 : [1976] 1 SCR 427; V.H. Patel & Company and Others v. Hirubhai Himabhai Patel and Others (2000) 4 SCC 368: [2000] 3 SCR 113; Abdul Kadir Samshuddin Bubere v. Madhav Prabharkar Oak and Another AIR 1962 SC 406: [1962] SCR 702 ; Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited 2021 (4) SCC 713; Rashid Raza v. Sadaf Akhthar (2019) 8 SCC 710 – relied on. Himangni Enterprises v. Kamaljeet Singh Ahluwalia (2017) 10 SCC 706: [2017] 10 SCR 139; N. Radhakrishnan v. Maestro Engineers and Others, (2010) 1 SCC 72: [2009] 15 SCR 371 – overruled Vidya Drolia and Others v. Durga Trading Corporation 2019 SCC OnLine SC 358; Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya and Another (2003) 5 SCC 531: [2003] 3 SCR 558; Deccan Paper Mills Co. Ltd. v. Regency Mahavir 2021 (4 ) SCC 786 – referred to. TELUS Communications Inc. v. Avraham Wellman (2019) SCC 19 (CanLII) Mitsubishi Motors Corp v. Soler Chrysler Plymouth Inc, 473 U.S. 614 S Ct 3346 (1985) (U.S. Supreme Court, 2 July 1985) – referred to Vanderbilt Journal of Transnational Law, vol. 36, No.4, October 2003, p. 1115-1136 ‘Who Decides the Arbitrator’s Jurisdiction? Separability and Competence- A B C D E F G H VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION 1015 Competence in Transnational Perspective’ by John J. Barcelo III; Law and Practice of Commercial Arbitration in England (2nd Ed. 1989) by Mustill and Boyd; Redfer Hunteron International Arbitration and Gary B. Bornin International Commercial Arbitration; A Second Look at Arbitrability: Approaches to Arbitration in the United States, Switzerland and Germany by Patrick M. Baron and Stefan Liniger; Conflict of Laws 98, 7th ed. 1974 by R.H. Graveson – referred to.

2.1 Issue of non-arbitrability can be raised at three stages. First, before the court on an application for reference under Section 11 of the Arbitration Act or for stay of pending judicial proceedings and reference under Section 8 of the Arbitration Act; secondly, before the arbitral tribunal during the course of the arbitration proceedings; or thirdly, before the court at the stage of the challenge to the award or its enforcement. [Para 51][1079- D-F]

2.2 Who decides the question of non-arbitrability? - a jurisdictional question is a technical legal issue, and requires clarity when applied to facts to avoid bootstrapping and confusion. The doubt as to who has the jurisdiction to decide could hinder, stray, and delay a many arbitration proceedings. To some extent, the answer depends on how much jurisdiction the enactment gives to the arbitrator to decide their own jurisdiction as well as the court’s jurisdiction at the reference stage and in the post-award proceedings. It also depends upon the jurisdiction bestowed by the enactment, viz. the facet of non-arbitrability in question, the scope of the arbitration agreement and authority conferred on the arbitrator. [Para 52][1079-F-H; 1080-A-B]

2.3 Under the Arbitration Act, 1940, the jurisdiction to settle and decide non-arbitrability issues relating to existence, validity, scope as well as whether the subject matter was capable of arbitration, with possible exception in case of termination, novation, frustration and ‘accord and satisfaction’ when contested on facts, was determined and decided at the first or at the reference stage by the courts. The principle being that the court A B C D E F G H 1016 SUPREME COURT REPORTS [2020] 11 S.C.R. should be satisfied about the existence of a valid arbitration agreement and that the disputes have arisen with regard to the subject matter of the arbitration agreement. At this stage, the court would be, however, not concerned with the merits or sustainability of the disputes. Despite best efforts to contain obstructive tactics, adjudication and final decision of non- arbitrability issues at the reference stage would invariably stop, derail and thwart the proceedings in the courts for years. [Para 53][1080-A-D]

2.4 The Arbitration Act based upon the UNCITRAL Model Law introduced an entirely new regimen with the objective to promote arbitration in commercial and economic matters as an alternative dispute resolution mechanism that is fair, responsive and efficient to contemporary requirements. One of the primary objectives of the Arbitration Act is to reduce and minimize the supervisory role of courts. Accordingly, the statutory powers of the arbitral tribunal to deal with and decide jurisdictional issues of non-arbitrability were amplified and the principles of separation and competence-competence were incorporated, while the courts retained some power to have a ‘second look’ in the post-award challenge proceeding. On the jurisdiction of the court at the referral stage, views of this Court have differed and there have been statutory amendments to modify and obliterate the legal effect of the court decisions. [Para 54][1080-D-F]

2.5 Clauses (a) and (b) to sub-section (1) to Section 16 of the Arbitration Act, enact the principle of separation of the arbitration agreement from the underlying or container contract. Clause (a), by legal fiction, gives an independent status to an arbitration clause as if it is a standalone agreement, even when it is only a clause and an integral part of the underlying or container contract. Clause (b) formulates a legal rule that a decision by the arbitral tribunal holding that the main contract is null and void shall not ipso jure entail invalidity of the arbitration clause. Successful challenge to the existence or invalidity or rescission of the main contract does not necessarily embrace an identical finding as to the arbitration agreement, provided the court is satisfied that the arbitration clause had been agreed upon. The A B C D E F G H VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION 1017 arbitration agreement can be avoided only on the ground which relates directly to the arbitration agreement. Notwithstanding the challenge to the underlying or container contract, the arbitration clause in the underlying or container contract survives for determining the disputes. The principle prevents boot-strapping as it is primarily for the arbitral tribunal and not for the court to decide issues of existence, validity and rescission of the underlying contract. Principle of separation authorises an arbitral tribunal to rule and decide on the existence, validity or rescission of the underlying contract without an earlier adjudication of the questions by the referral court. [Para 81][1116-A-E] Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC 141: [1974] 2 SCR 240 ; Union of India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362: [1960] SCR 49 – referred to. Fiona Trust and Holding Corpn. v. Privalov (2007) 1 All ER (Comm) 891:2007 Bus LR 686 (CA); Buckeye Check Cashing Inc. v. Cardegna 163 L Ed 2d 1038: 46 US 440 (2006) : 2006 SCC OnLine US SC 14; Prima Pain Corpn. v. Flood & Conklin Mfg. Co. L Ed 2nd 1270; 388 US 395 (1967):1967 SCC OnLine US SC 160; Southland Corpn. v. Keating, 1984 SCC OnLine US SC 19 – referred to. On Arbitrability: Persisting Misconceptions and New Areas of Concern by Stavros Brekoulaki; Emmanuel Gaillard and Yas Banifatemi in Negative Effect of Competence-Competence: The Rule of Priority in Favour of the Arbitrators; John J. Barcelo III, ;Paper titled ‘Who Decides the Arbitrator’s Jurisdiction? Separability and Competence-Competence Transnational Perspective’, by Prof. Stephen J. Ware in Arbitration Law’s Separability Doctrine After Buckeye Check Cashing, Inc.- referred to.

2.6 Principles of competence-competence have positive and negative connotations. As a positive implication, the arbitral tribunals are declared competent and authorised by law to rule A B C D E F G H 1018 SUPREME COURT REPORTS [2020] 11 S.C.R.

as to their jurisdiction and decide non-arbitrability questions. In case of expressed negative effect, the statute would govern and should be followed. Implied negative effect curtails and constrains interference by the court at the referral stage by necessary implication in order to allow the arbitral tribunal to rule as to their jurisdiction and decide non-arbitrability questions. As per the negative effect, courts at the referral stage are not to decide on merits, except when permitted by the legislation either expressly or by necessary implication, such questions of non- arbitrability. Such prioritisation of arbitral tribunal over the courts can be partial and limited when the legislation provides for some or restricted scrutiny at the ‘first look’ referral stage. [Para 83][1117-G-H; 1118-A-B]

2.7 Section 16(1) of the Arbitration Act accepts and empowers the arbitral tribunal to rule on its own jurisdiction including a ruling on the objections, with respect to all aspects of non-arbitrability including validity of the arbitration agreement. A party opposing arbitration, as per sub-section (2), should raise the objection to jurisdiction of the tribunal before the arbitral tribunal, not later than the submission of statement of defence. However, participation in the appointment procedure or appointing an arbitrator would not preclude and prejudice any party from raising an objection to the jurisdiction. Obviously, the intent is to curtail delay and expedite appointment of the arbitral tribunal. The clause also indirectly accepts that appointment of an arbitrator is different from the issue and question of jurisdiction and non-arbitrability. As per sub-section (3), any objection that the arbitral tribunal is exceeding the scope of its authority should be raised as soon as the matter arises. However, the arbitral tribunal, as per sub-section (4), is empowered to admit a plea regarding lack of jurisdiction beyond the periods specified in sub- section (2) and (3) if it considers that the delay is justified. As per the mandate of sub-section (5) when objections to the jurisdiction under sub-sections (2) and (3) are rejected, the arbitral tribunal can continue with the proceedings and pass the arbitration award. A party aggrieved is at liberty to file an application for setting aside such arbitral award under Section 34 of the A B C D E F G H VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION 1019 Arbitration Act. Sub-section (3) to Section 8 in specific terms permits an arbitral tribunal to continue with the arbitration proceeding and make an award, even when an application under sub-section (1) to Section 8 is pending consideration of the court/ forum. Therefore, pendency of the judicial proceedings even before the court is not by itself a bar for the arbitral tribunal to proceed and make an award. [Para 84][1118-C-H]

2.8 Section 34 of the Act is applicable at the third stage post the award when an application is filed for setting aside the award. Under Section 34, an award can be set aside – (i) if the arbitration agreement is not valid as per law to which the party is subject; (ii) if the award deals with the disputes not contemplated by or not falling within the submission to arbitration, or contains a decision on the matter beyond the scope of submission to arbitration; and (iii) when the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. Thus, the competence - competence principle, in its negative effect, leaves the door open for the parties to challenge the findings of the arbitral tribunal on the three issues. The negative effect does not provide absolute authority, but only a priority to the arbitral tribunal to rule the jurisdiction on the three issues. The courts have a ‘second look’ on the three aspects under Section 34 of the Arbitration Act. [Para 85][1119-A-D]

2.9 The courts at the referral stage do not perform ministerial functions. They exercise and perform judicial functions when they decide objections in terms of Sections 8 and 11 of the Arbitration Act. Section 8 prescribes the courts to refer the parties to arbitration, if the action brought is the subject of an arbitration agreement, unless it finds that prima facie no valid arbitration agreement exists. Prima facie case in the context of Section 8 is not to be confused with the merits of the case put up by the parties which has to be established before the arbitral tribunal. It is restricted to the subject matter of the suit being prima facie arbitrable under a valid arbitration agreement. Prima facie case means that the assertions on these aspects are bona fide. When read with the principles of separation and competence- competence and Section 34 of the Arbitration Act, referral court without getting bogged-down would compel the parties to abide A B C D E F G H 1020 SUPREME COURT REPORTS [2020] 11 S.C.R. A unless there are good and substantial reasons to the contrary. [Para 86][1119-D-G; 1120-A-B] Nirmala J. Jhala v. State of Gujarat and Another (2013) 4 SCC 301: [2013] 5 SCR 2006 – relied on.

2.10 Prima facie examination is not full review but a primary first review to weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes. The prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straight forward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage. Only when the court is certain that no valid arbitration agreement exists or the disputes/ subject matter are not arbitrable, the application under Section 8 would be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary and not a mini trial. This necessarily reflects on the nature of the jurisdiction exercised by the court. [Para 87][1120-B-D] NCC Ltd. v. Indian Oil Corporation Ltd., Arbitration Petition No. 115 of 2018 decided on 08.02.2019; Silver Dry Bulk Company Limited v. Homer Hulbert Maritime Company Limited, (2017) EWHC 44 (Comm.) – referred to. Silver Dry Bulk Company Limited v. Homer Hulbert Maritime Company Limited (2017) EWHC 44 (Comm.) – referred to

2.11 The nature and facet of non-arbitrability could also determine the level and nature of scrutiny by the court at the referral stage. The court can examine contractual aspects of arbitration agreement, at referral stage and jurisdictional aspects of arbitration agreement which he feels should be left to the arbitral tribunal. The issue of non-arbitrability can be divided into procedural and substantive objections. The procedurals are ‘gateway questions’ which would presumptively be for the arbitrator to decide at least at the first stage. In the Indian context, B C D E F G H VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION 1021 it can be divided into three categories. The first category of issues, namely, whether the party has approached the appropriate High Court, whether there is an arbitration agreement and whether the party who has applied for reference is party to such agreement would be subject to more thorough examination in comparison to the second and third categories/issues which are presumptively, save in exceptional cases, for the arbitrator to decide. The first category, would include the questions or issues relating to whether the cause of action relates to action in personam or rem; whether the subject matter of the dispute affects third party rights, have erga omnes effect, requires centralized adjudication; whether the subject matter relates to inalienable sovereign and public interest functions of the State; and whether the subject matter of dispute is expressly or by necessary implication non-arbitrable as per mandatory statue(s). Such questions arise rarely and, when they arise, are on most occasions questions of law. On the other hand, issues relating to contract formation, existence, validity and non-arbitrability would be connected and intertwined with the issues underlying the merits of the respective disputes/claims. They would be factual and disputed and for the arbitral tribunal to decide. The court may for legitimate reasons, to prevent wastage of public and private resources, can exercise judicial discretion to conduct an intense yet summary prima facie review while remaining conscious that it is to assist the arbitration procedure and not usurp jurisdiction of the arbitral tribunal. Undertaking a detailed full review or a long-drawn review at the referral stage would obstruct and cause delay undermining the integrity and efficacy of arbitration as a dispute resolution mechanism. Conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. There are certain cases where the prima facie examination may require a deeper consideration. The court’s challenge is to find the right amount of and the context when it would examine the prima facie case or exercise restraint. The legal order needs a right balance between avoiding arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the matter is clearly non-arbitrable. [Para 88][1122-B-H; 1123-A-B] A B C D E F G H 1022 SUPREME COURT REPORTS [2020] 11 S.C.R. National Insurance Company Limited v. Boghara Polyfab Private Limited (2009) 1 SCC 267: [2008] 13 SCR 638 – relied on. Ozlem Susler – ‘The English Approach to Competence- Competence’ – referred to.

2.12 Accordingly, when it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the arbitral tribunal selected by the parties by consent. The underlying rationale being not to delay or defer and to discourage parties from using referral proceeding as a rue to delay and obstruct. In such cases a full review by the courts at this stage would encroach on the jurisdiction of the arbitral tribunal and violate the legislative scheme allocating jurisdiction between the courts and the arbitral tribunal. Centralisation of litigation with the arbitral tribunal as the primary and first adjudicator is beneficent as it helps in quicker and efficient resolution of disputes. [Para 89][1123-C-E]

2.13 The Court would exercise discretion and refer the disputes to arbitration when it is satisfied that the contest requires the arbitral tribunal should first decide the disputes and rule on non-arbitrability. Similarly, discretion should be exercised when the party opposing arbitration is adopting delaying tactics and impairing the referral proceedings. [Para 90][1123-E-F] Dell Computer Corporation v. Union des consommateurs and Olivier Dumoulin [2007] 2 S.C.R. 801; TELUS Communications Inc. v. Avraham Wellman (2019) SCC 19 (CanLII) – referred to

2.14 Section 11(6) of Arbitration Act requires the court to appoint an arbitrator on an application made by a party. Section (6-A) to Section 11 stipulates that the court shall, at the stage of appointment under sub-section (4), (5) or (6), confine itself to the examination of the existence of an arbitration agreement. Sub-section (6-A) was omitted by Act 33 of 2019, but the omission is in view of the introduction of a new regime of institutionalised A B C D E F G H VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION 1023 arbitration as per the report of the committee headed by Justice B. N. Srikrishna, dated 30.07.2017. [Para 91][1124-D-E] A

2.15 It would be wrong to accept that post omission of sub- section (6-A) to Section 11 the ratio in *Patel Engineering Ltd. would become applicable. *Patel Engineering Ltd. has been legislatively overruled and hence would not apply even post omission of sub-section (6-A) to Section 11 of the Arbitration Act. The omitted sub-section (6-A) to Section 11 of the Arbitration Act would continue to apply and guide the courts on its scope of jurisdiction at stage one, that is the pre-arbitration stage. Omission of sub-section (6-A) by Act 33 of 2019 was with the specific object and purpose and is relatable to by substitution of sub-sections (12), (13) and (14) to Section 11 of the Arbitration Act by Act 33 of 2019, which, vide sub-section (3A) stipulates that the High Court and this court shall have the power to designate the arbitral institutions which have been so graded by the Council under Section 43-I, provided where a graded arbitral institution is not available, the concerned High Court shall maintain a panel of arbitrators for discharging the function and thereupon the High Court shall perform the duty of an arbitral institution for reference to the arbitral tribunal. [Para 91][1124-G-H; 1125-B-E] Mayavati Trading Private Limited v. Pradyuat Deb Burman (2019) 8 SCC 714:[2019] 12 SCR 123 65 – relied on.

2.16 On jurisprudentially and textualism it is possible to differentiate between existence of an arbitration agreement and validity of an arbitration agreement. Such interpretation can draw support from the plain meaning of the word “existence’ in s. 11 of the Arbitration Act. However, it is equally possible, jurisprudentially and on contextualism, to hold that an agreement has no existence if it is not enforceable and not binding. Existence of an arbitration agreement presupposes a valid agreement which would be enforced by the court by relegating the parties to arbitration. Legalistic and plain meaning interpretation would be contrary to the contextual background including the definition clause and would result in unpalatable consequences. B C D E F G H 1024 SUPREME COURT REPORTS [2020] 11 S.C.R. A reasonable and just interpretation of ‘existence’ requires understanding the context, the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law. [Para 92][1125-F-H; 1126-A-C] Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (2019) 9 SCC 209: [2019] 5 SCR 579 – relied on.

2.17 The court at the reference stage exercises judicial powers. ‘Examination’, as an ordinary expression in common parlance, refers to an act of looking or considering something carefully in order to discover something. It requires the person to inspect closely, to test the condition of, or to inquire into carefully. It would be rather odd for the court to hold and say that the arbitration agreement exists, though ex facie and manifestly the arbitration agreement is invalid in law and the dispute in question is non-arbitrable. The court is not powerless and would not act beyond jurisdiction, if it rejects an application for reference, when the arbitration clause is admittedly or without doubt is with a minor, lunatic or the only claim seeks a probate of a Will. [Para 92 (ii)][1127-A-C]

2.18 Most scholars and jurists accept and agree that the existence and validity of an arbitration agreement are the same. Most jurisdictions accept and require prima facie review by the court on non-arbitrability aspects at the referral stage. [Para 92 (iii) and (iv)][1127-C-D]

2.19 Sections 8 and 11 of the Arbitration Act are complementary provisions as was held in *Patel Engineering Ltd. A B C D E F G H VIDYA DROLIA AND OTHERS v. DURGA TRADING CORPORATION 1025 The object and purpose behind the two provisions is identical to compel and force parties to abide by their contractual understanding. This being so, the two provisions should be read as laying down similar standard and not as laying down different and separate parameters. Section 11 does not prescribe any standard of judicial review by the court for determining whether an arbitration agreement is in existence. Section 8 states that the judicial review at the stage of reference is prima facie and not final. Prima facie standard equally applies when the power of judicial review is exercised by the court under Section 11 of the Arbitration Act. Therefore, the mandate of valid arbitration agreement in Section 8 can be read into mandate of Section 11, that is, ‘existence of an arbitration agreement’. [Para 92 (v)][1127- E-G]

2.20 Exercise of power of prima facie judicial review of existence as including validity is justified as a court is the first forum that examines and decides the request for the referral. Absolute “hands off” approach would be counterproductive and harm arbitration, as an alternative dispute resolution mechanism. Limited, yet effective intervention is acceptable as it does not obstruct but effectuates arbitration. Exercise of the limited prima facie review does not in any way interfere with the principle of competence–competence and separation as to obstruct arbitration proceedings but ensures that vexatious and frivolous matters get over at the initial stage. [Para 92 (vi) and 92 (vii)][1127-G-H; 1128-A-B]

2.21 Exercise of prima facie power of judicial review as to the validity of the arbitration agreement would save costs and check harassment of objecting parties when there is clearly no justification and a good reason not to accept plea of non- arbitrability. [Para 92 (viii)][1128-B-C]