Supreme Court: Previous Tests for Judicial Interference in Arbitration Outdated

In a significant pro-arbitration judgment, the Supreme Court on Thursday held that referral courts cannot go beyond the scope of enquiry under the Arbitration and Conciliation Act.

A Bench comprising Chief Justice of India (CJI) DY Chandrachud and Justices JB Pardiwala and Manoj Misra outlined the importance of adhering to arbitration norms and agreements in this regard. A referral court only steps in when the procedure for appointing arbitrators is not adhered to, the Court added.

"If the referral court... goes beyond the scope of enquiry as provided under the section and examines the issue of 'accord and satisfaction', then it would amount to usurpation of the power which the parties had intended to be exercisable by the arbitral tribunal alone and not by the national courts.

Such a scenario would impeach arbitral autonomy and would not fit well with the scheme of the Act, 1996," the Court said.
Pertinently, the Bench took a dim view of previous tests for judicial interference in arbitration matters laid down by the apex court.

"Tests like the 'eye of the needle' and 'ex-facie meritless', although they try to minimise the extent of judicial interference, yet they require the referral court to examine contested facts and appreciate prima facie evidence (however limited the scope of enquiry may be) and thus are not in conformity with the principles of modern arbitration which place arbitral autonomy and judicial non-interference on the highest pedestal," the top court held.

The observations came in a judgment dealing with the scope and standard of judicial scrutiny when a plea of 'accord and satisfaction' is taken in an application under Section 11(6) of the 1996 Act.

The case involved SBI General Insurance (appellant) and Krish Spinning (respondent), following insurance claims related to two fire incidents at the latter's factory.

As the parties could not arrive at an amicable resolution of their dispute, the respondent invoked the arbitration clause and moved the Gujarat High Court for the appointment of an arbitrator. Before the High Court, it claimed that the appellant paid only ₹84 lakh out of the loss of ₹1.76 crore suffered by it.

The appellant contested the arbitration petition, arguing that the claim raised by the respondent was stale, and having once signed the consent letter dated in December 2018, it was not open for it to turn around and raise a dispute.

It pointed out that the respondent had signed an advance discharge voucher dated January 2019, confirming the receipt of ₹84 lakh. The discharge voucher also stated that the respondent was discharging the appellant of the liability arising under its claim.

The High Court held that if the dispute existing between the parties could be referred to arbitration under the arbitration agreement, then the appointment of an arbitrator must follow. An order for the appointment of an arbitrator was eventually passed, leading to the present appeal.

The following issues arose before the apex court:

1. Whether the execution of a discharge voucher towards the full and final settlement between the parties would operate as a bar to invoking arbitration?

2. What is the scope and standard of judicial scrutiny that an application under Section 11(6) of the Act, 1996 can be subjected to when a plea of 'accord and satisfaction' is taken by the defendant?

3. What is the effect of the decision of this Court in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1966 and the Indian Stamp Act 1899 on the scope of powers of the referral court under Section 11 of the Act, 1996?

To answer the first question, the Court said that a dispute on whether a contract has been discharged or not is an arbitrable dispute.

"The intention of the parties in discharging a contract by 'accord and satisfaction' is to relieve each other of the existing or any new obligations under the contract. Such a discharge of obligations under the substantive contract cannot be construed to mean that the parties also intended to relieve each other of their obligation to settle any dispute pertaining to the original contract through arbitration," the Court stated.

Regarding the second question, the Court delved into Section 11(6A), which limits the referral jurisdiction of a court when it comes to the appointment of arbitrators, to the examination of the existence of an arbitration agreement.

The position prior to the amendment that introduced Section 11(6A) was that a court could reject an application for the appointment of an arbitrator based on its 'accord and satisfaction.' It noted that despite the introduction of Section 11(6A), there have been diverging views on whether the scope of the referral court under Section 11 includes the power to go into the question of 'accord and satisfaction.'

After reviewing several judgments on the issue, the Court said that in such cases, the court should not examine such issues before the arbitral tribunal has had the opportunity to look into them first.

"The question of 'accord and satisfaction', being a mixed question of law and fact, comes within the exclusive jurisdiction of the arbitral tribunal, if not otherwise agreed upon between the parties. Thus, the negative effect of competence-competence would require that the matter falling within the exclusive domain of the arbitral tribunal should not be looked into by the referral court, even for a prima facie determination, before the arbitral tribunal first has had the opportunity of looking into it," the judgment said.

For the third question, the Bench referred to its judgment in In Re: Interplay Between Indian Stamp Act and Indian Arbitration Act, in which it was held that while unstamped arbitration agreements are inadmissible, they are not rendered void ab initio.
It specifically referred to the aspect of arbitral autonomy, which it said permeates the Arbitration Act.

"What follows from the negative facet of arbitral autonomy when applied in the context of Section 16 is that the national courts are prohibited from interfering in matters pertaining to the jurisdiction of the arbitral tribunal, as exclusive jurisdiction on those aspects vests with the arbitral tribunal," it held.

It also discussed the negative aspect of the doctrine of competence-competence, explaining,

"The negative aspect of competence-competence is aimed at restricting the interference of the courts at the referral stage by preventing the courts from examining the issues pertaining to the jurisdiction of the arbitral tribunal before the arbitral tribunal itself has had the opportunity to entertain them."

The Court went on to uphold the arbitration agreement between the parties, including the appointment of retired Gujarat High Court judge Justice KA Puj as an arbitrator.

The judgment stressed that the scope of enquiry at the stage of the appointment of an arbitrator is limited to the scrutiny of the prima facie existence of the arbitration agreement, and the 'accord and satisfaction' of claims being contested does not question such agreements.

Thus, the question of 'accord and satisfaction' is to be decided by the arbitral tribunal and not the parties.
If referral courts delve into the details of such issues, the objective of expediency and simplification of arbitration pleadings is hindered, the Court added.