Economics & Corporate Law

Vidya Drolia: The Failure To Shake-Off The Ghost Of The Past?

Shivankar Sukul & Vedaant Agarwal
 
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This Post attempts to analyze the recent judgement of the Supreme Court in Vidya Drolia v Durga Trading Corporation and point out the failure of the court to forego judicial intervention at reference stage in favor of applying kompetenz-kompetenz principle to its full effect.

Introduction

The recent decision of the three judge bench in the matter of Vidya Drolia v. Durga Trading Corporation (“Vidya Drolia”) was long awaited to finally determine the law on subject matter arbitrability. The judgment has been lauded by scholars and practitioners alike for being pro-arbitration and bringing the issues relating to the Transfer of Property Act, 1882, within the scope of arbitrability.

In this post, the authors will explore the implications of Vidya Drolia to the ever-contentious question of the judicial scope of inquiry at the reference stage. The main issue this post will underline is the reluctance of Indian courts to forego the power of intervention at the reference stage in favor of the arbitrator to decide the issue of subject matter arbitrability. Further, the post will point out the inconsistency between the judgments penned by Justice Sanjiv Khanna and Justice Ramanna. While doing so, the authors argue that a ‘case to case’ adjudication of the subject matter arbitrability is better than laying down bold expositions of the law prohibiting arbitrability per se on such subject matters, even in the case the courts were to go into this issue at the reference stage.


The Past is Prologue    

Disputes related to certain subject matters are not capable of adjudication by a private forum like an arbitral tribunal because of the ‘rights in rem’ involved therein. These non-arbitrable disputes have no express mention in the Arbitration and Conciliation Act, 1996 (“Act”). Therefore, it falls upon the courts to determine the arbitrability of the subject matter on a case to case basis. This issue of ‘subject matter arbitrability’ has been the focus of much litigation and has often been raised during the referral stage under sections 8 and 11 of the Act since a non-arbitrable subject matter would invalidate the arbitration agreement itself. As a consequence, ‘arbitrability’ becomes a condition precedent for the ‘validity’ of the arbitration agreement. Thus, the scope of judicial inquiry during the reference stage becomes a contentious issue.   

This issue first came up for consideration in SBP & Co. v. Patel Engineering Limited (“SBP Engineering”). The  Supreme Court (“SC”), while examining the scope of judicial inquiry at the reference stage, held that the court has to determine the subsistence of an arbitrable dispute at the reference stage itself (Para 38). This view was later affirmed in National Insurance Company Limited v. Boghara Polyfab Private Limited, wherein the SC expressly recognized the jurisdiction of the court to decide upon the arbitrability of the dispute at the reference stage (Para 18). This position was further expanded in Booz Allen and Hamilton Inc. v. SBI Home Finance Limited (2011), where the SC held that the issue of ‘subject matter arbitrability’ cannot be left to the arbitrator (Para 20).

As a result of such a wide scope of judicial inquiry at the referral stage, unscrupulous litigants approach the courts claiming invalidity of the arbitration agreement on the grounds of the non-arbitrability of the subject matter. Taking note of such counter-productive litigation, the legislature introduced the Arbitration and Conciliation (Amendment) Act, 2015. This amendment, under Section 8(1), expressly restricted Courts from conducting a ‘prima facie’ examination of the existence and validity of the arbitration agreement. Moreover, it introduced sub-section 6A, which formally confined the examination under Section 11 to the existence of the arbitration agreement. Hence, these amendments essentially aimed to limit the judicial intervention and discard the examination of ‘subject matter arbitrability’ at the referral stage. 

However, it was in 2019 that the legislature, by institutionalizing Arbitration, introduced sweeping amendments to end the scope of judicial interference. Despite such sweeping changes, two contrary approaches cropped up. First, was the pro-arbitration approach, under which the SC minimized judicial intervention at the referral stage. Second, was the interventionist approach whereby the SC affirmed judicial inquiry into the subject matter arbitrability at the referral stage. As a consequence of such divergence, a three judge bench was constituted in Vidya Drolia to finally decide upon this issue.


Reluctance of Foregoing Judicial Intervention

In Vidya Drolia, the SC had the opportunity to uphold the legislative intent behind the 2015 Amendment and lean towards the kompetenz- kompetenz principle instead of intervention at the reference stage. The policy to promote the principle of kompetenz- kompetenz is evident from Section 16 of the Act which posits that the arbitral tribunal shall have the power to determine its jurisdiction, read with other efforts to curb judicial intervention at the reference stage. It follows therefore that the question of arbitrability should be left to be determined by the arbitral tribunal. Reading this with the scheme of the statute, it seems to be a reasonable inference as well since courts have the jurisdiction to have a  second look at an award after it has been granted, under Section 34 of the Act, where the court may reject the award if it contravenes “public policy” hence giving it the power to determine the arbitrability of the dispute at that stage, if needed.

Additionally, the Justice B. N. Srikrishna Committee Report on “Institutionalization of Arbitration in India”, a precursor to the Arbitration and Conciliation (Amendment) Act, 2019, stressed on curbing such extensive judicial involvement at the reference stage. For that reason, the amendment expunged section 11(6A) of the act, thereby prohibiting the courts from entering into the question of the existence of the arbitration agreement and designating an arbitral institution for the appointment of the arbitrator. Hence, the amendment intended to expand the principle of kompetenz-kompetenz and place the issue of subject matter arbitrability in the exclusive domain of arbitral tribunal, subject to a second look at the post award stage under Section 34 of the Act.

However, the courts have deliberately chosen to gloss over this policy decision to promote arbitration, effectively strangling the arbitration regime. Despite the clear legislative mandate to reduce judicial intervention at the reference stage and expand the kompetenz- kompetenz principle, the court has been reluctant to vacate its power in favor of the arbitral tribunal. Vidya Drolia had presented the court with a golden opportunity to narrowly construct the term “existence and validity”, however, it shied away from it relying instead on the misconceived observations of the seven judge bench in SBP Engineering which stands nullified by later amendments to the law (Para 41).


Gaping Loopholes  

The leading opinion in Vidya Drolia has been penned by Justice Sanjiv Khanna while a concurring opinion has been given by Justice Ramanna. Though the judgment lays down a clear and straightforward test for deciding the arbitrability of the subject matter, there seems to be an unassuming yet profound contradiction between these two opinions regarding how arbitrability has to be decided. 

Justice Khanna while discussing the meaning of non-arbitrability held that certain disputes which relate to the erga omnes rights of the parties should be dealt with by a centralized forum. While enumerating such issues he observed that intra-company, insolvency, and patent law disputes should be dealt with by a centralized forum (Para 46).  As contrasted from Justice Ramanna’s opinion, this approach of declaring a blanket prohibition on the arbitrability of certain subjects is not only against the established tenets of the arbitration law but also suffers from gaping loopholes.

Justice Ramanna took a relatively fresh approach to the problem of adjudicating upon the arbitrability of certain issues. He opined that the court should pragmatically analyze the case in hand and not render any arbitration clause otiose merely because it appeared to fall within such a ‘prohibited’ sphere (Para 61). He categorically held that a court should identify and specify how the arbitration agreement runs contrary to public policy while declaring it invalid on the count of arbitrability (Para 51).  In this manner, he vehemently opposed broad expositions of the law prohibiting arbitral tribunals from adjudicating in certain subject matters.

It is to be noted that whether a subject matter can or cannot be arbitrated should necessarily be dealt on a case to case basis, rather than having a bold exposition that certain subject matters are incapable of arbitration.”  (Para 51) 

This opinion of Justice Ramanna reflects a pragmatic understanding of the law: it takes cognizance of the possibilities of intentionally “dressing up ” vexatious petitions as insolvency or intra-company disputes, to subvert arbitration clauses. At the reference stage, the courts need to prevent such unscrupulous litigants – which can only be done by dealing with subject matter arbitrability on a case to case basis rather than declaring broad expositions of law. 


Conclusion

The Arbitration and Conciliation (Amendment) Act, 2019 reflected the legislative intent to institutionalize arbitration and discard judicial involvement (along with its downfalls and criticisms). However, at the reference stage, courts have habitually followed an interventionist approach. Consequentially, while answering questions about who decides the arbitrability of a subject-matter, they have often misjudged the issue in favor of doing justice in the case at hand, but laying down questionable precedent for the future at the same time. The judicial course must align with legislative intent and let go of such a wide scope of intervening powers in favor of the arbitral tribunal. Even if the court decides to examine the subject-matter arbitrability to cut the deadwood, then it must do so on a case to case basis as suggested by Justice Ramanna and avoid the pitfall of ‘dressed-up’ petitions, arising from the blanket ban approach laid down by Justice Sanjiv Khanna. 

However, the said approach again is another slippery slope: to weed out dressed-up petitions, the court would have to untangle the complex web of facts and circumstances related to the matter at hand effectively going beyond the prima facie requirement of examining the ‘existence and validity’ of the arbitration agreement. It therefore makes sense for Courts to refrain from addressing the subject matter arbitrability at the reference stage altogether.


The authors are third year students at the National Law University, Jodhpur.

    

1 reply »

  1. Amazing article and probably the only one to deeply analyse such an important decision

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