Friday, July 2, 2010

Recent Developments on the Scope of S. 11 Jurisdiction: Guest Post by Niranjan V.

We are happy to publish here a guest post by Niranjan V. Niranjan is a final year student of law at National Law School of India University Bangalore. He is a Rhodes Scholar elect for the present academic year and will proceed to read for BCL at Oxford University. The following is the text of Niranjan's post. We express our sincere gratitude to Niranjan for this post.
It is no surprise that the Government of India released a Consultation Paper in April 2010, proposing (effectively) a new Arbitration Act. In its short history of fourteen years, the Arbitration and Conciliation Act, 1996, has attracted strong criticism, especially on account of a series of well known Supreme Court decisions that are said to have interpreted the Act widely. As these decisions themselves are too well-known to require discussion, the purpose of this post is to highlight interesting developments arising out of one of these – SBP v. Patel Engineering, AIR 2006 SC 540.

As is well-known, the Supreme Court held in Patel Engineering that the jurisdiction of the appointing authority under s. 11 of the Act is wide, and is of a “judicial” nature. The result is that an application seeking the appointment of an arbitrator today requires the court to ascertain the existence of an arbitration agreement, its validity and so on, often involving complex questions of law and fact. Much has been said on whether the Court reached the correct conclusion in that case. As it continues to be the existing position of law today, it is perhaps more important to examine the implications of Patel Engineering for the appointment of arbitrators under the Indian Act.
The most significant development post-Patel Engineering has perhaps been the emergence of a line of authority narrowing the ambit of that decision. Three decisions are important in this respect – National Insurance Co. v. Boghara Polyfab, (2009) 1 SCC 267; Shivnath Rai v. Ghaffar, AIR 2008 SC 1906 and Anil Kumar v. BS Neelkanta, Unreported (decided by the Supreme Court on May 7, 2010). Of these, the second turns more on the territorial scope of the Act (the relationship between ss. 11 and 42) than on the scope of s. 11 jurisdiction.
In Boghara Polyfab, a party covered by an insurance policy made a claim arising out of damage to insured property. Disputes arose between the parties following the surveyor’s report, and the claim was eventually settled for an amount significantly lower than the initial claim. Subsequently, the policyholder alleged that the settlement was procured by coercion, and invoked the arbitration clause in the insurance policy. The insurance company resisted the s. 11 application on the ground that a full and final settlement “discharges the contract by accord and satisfaction”, and consequently leaves no room for invoking the arbitration clause. The policyholder, on the other hand, alleged that the settlement had been procured by “coercion” and was consequently invalid. At issue before the Court was whether the appointing authority is competent to adjudicate such questions following the decision in Patel Engineering.
The Court explained that the rule in Patel Engineering address three categories of questions: those which the court must decide, to the exclusion of the Tribunal; those which the court may, at its discretion decide, and finally those which the court may not decide. Under the first category is the foundational question of whether there is an arbitration agreement between the parties. To this extent, the jurisdiction of the Tribunal under s. 16 cannot be exercised, as it is bound by the finding of the appointing authority. Under the second category falls questions that affect the validity of the arbitration agreement, but which are not as fundamental as its very existence – for example, whether the claim is “live”, or, as in Boghara Polyfab, whether the discharge of the contract was valid. These are questions that the appointing authority is empowered but not required to decide. However, if the authority chooses to exercise its discretion, the Tribunal remains bound by its finding, notwithstanding its jurisdiction under s. 16. Finally, the Court in Boghara Polyfab identified two types of questions that cannot be resolved by the appointing authority – whether a claim falls within an arbitration clause, and “merits or any claim involved in the arbitration”.
Boghara Polyfab is a clear exposition of the relationship between the court and the arbitral tribunal, and clarifies the extent to which the kompetenz-komptenz principle codified in s. 16 operates in India. To some extent, it appears to envisage a narrower role for the appointing authority than the Constitution Bench in Patel Engineering. That it does so while remaining at all times, as it had to, within the framework created by Patel Engineering makes it an influential decision – indeed, the “reformulation” of Patel Engineering draws from language used by the Constitution Bench. It has been widely cited subsequently in cases involving s. 11 (see, for example, Asian Techs v. Union of India, (2009) 10 SCC 354).
Anil Kumar v. BS Neelkanta lays down similar principles, with one crucial difference. The case, decided about two months ago by the Supreme Court, arose out of a complicated set of agreements and transactions which it is not necessary to consider in detail here. It will suffice to note that the Andhra Pradesh Tourism Development Corporation Ltd. [“APTDCL”] granted a lease on the condition the composition (shareholding) of the recipient would not change without its prior written consent. Consent was given, but disputes arose as to whether the subsequent share transfer remained consistent with the terms of the consent. Several entities were involved in the transaction, some of which had entered into arbitration agreements. When an application was filed under s. 11 was filed, the objection was taken that the claim was no longer “live” – a contention that the Court classified under “category two” in Boghara Polyfab.
In Anil Kumar, the Court noticed the relevant passages in Patel Engineering, and proceeded to hold as follows:
It is clear from the above extracted paragraph that in order to set into motion the arbitral procedure, the Chief Justice or his designate has to decide the issues, if raised, regarding: (i) territorial jurisdiction; (ii) existence of an Arbitration Agreement between the parties and (iii) whether the claim made by the applicant was a dead one in the sense that the parties have already concluded the transaction by recording satisfaction of their mutual rights and obligations or have recorded satisfaction regarding their financial claims. Nevertheless, the Court made it clear that at that stage it may not be possible to decide whether a live claim made, is one which comes within the purview of the arbitration clause and this question should be left to be decided by the Arbitral Tribunal on taking evidence. It is, therefore, plain that purely for the purpose of deciding whether the arbitral procedure is to be set into motion or not, the Chief Justice or his designate has to examine and record his satisfaction that an Arbitration Agreement exists between the parties and that in respect of the agreement a live issue, to be decided between the parties, still exists. On being so satisfied, he may allow the application and appoint an Arbitral Tribunal or a sole Arbitrator, as the case may be. However, if he finds and is convinced that the claim is a dead one or is patently barred by time or that he lacks territorial jurisdiction, he may hold so and decline the request for appointment of an Arbitrator [emphasis mine].
By observing that the Chief Justice or his designate “has to” decide whether the claim continues to be live or not, the Court appears to have subtly reformulated the rule in Boghara Polyfab. If this observation is correct, it implies that resolving the contention that a claim is no longer live moves to “category one” of Boghara Polyfab – even when it is difficult for the authority, as a matter of evidence, to make the decision.
While one must await future Supreme Court opinions before coming to a definitive conclusion on the subject, it appears unlikely that the observations in Anil Kumar represent a change in the position of law. For one, the issue was not before the court, and did not require adjudication – the observation, therefore, may represent obiter dicta. In addition, it is difficult to conclude that the court intended to lay down a rule that an appointing authority must invariably decide whether the claim is live – a claim that is typically heavily factual. 

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