Akash Surya
I. Introduction
Recently, in the case of Lombardi Engineering v. UJVNL ('Lombardi'), the Supreme Court (‘SC’) heard an arbitration petition under section 11(6) of the Arbitration and Conciliation Act 1996 (‘the Act’) for appointment of arbitrators pursuant to the arbitration agreement. The petitioners, however, challenged the very constitutionality of the arbitration clause on the grounds that the pre-deposit condition of having to deposit 7% of the claimed amount was arbitrary and violative of Article 14. The court accepted this argument, observing that the pre-deposit condition contained in the clause was not in the nature of a security deposit, and thereby was arbitrary and violative of Article 14. To justify its stance, the court relied on two strands of reasoning- precedents of the SC and Kelsen’s Pure theory of Law.
My central argument in this paper is that this judgement requires particular consideration in light of the principles laid down by the 7-judge bench recently in the case of In Re: Interplay. The brief points of divergence between the two judgements are as follows. Firstly, while the instant judgment relies on the case of Vidya Drolia to justify its exercise of testing the constitutionality of the arbitration clause in an application made under section 11 of the Act, the court in In Re: Interplay has clarified that the principles laid down in Vidya Drolia with respect to judicial intervention under section 11 were erroneous; secondly, the court in In Re: Interplay acknowledged that the legislative intent behind the introduction of section 11-A of the Act was to restrict judicial intervention at pre-arbitral stages to a minimum. However, the court in Lombardi conflated the terms “existence” and “validity” of an arbitration agreement as under section 11-A, and has thus gone beyond what the legislature envisaged the role of the judiciary to be under a section 11 application.
Accordingly, I propose two arguments - first, that the court’s reliance on Vidya Drolia in the present judgement to justify an increased level of judicial interference under section 11 is now evidently inappropriate as the principles laid down in Drolia have been held to be erroneous in In Re; and secondly, the court in Lombardi also relied on the cases of ICOMM v. Punjab and TRF Limited v. Energo to show that the Supreme Court had previously tested the constitutionality of arbitration clauses, and therefore that the instant judgement was not ‘alien’ to Indian jurisprudence. I argue that this strand of reasoning is also improper as the reliance placed on these two precedents was also misguided.
II. The Foundation of the Judgement: Precedents and Kelsen’s Theory
Firstly, the court relied on the case of Vidya Drolia to examine the scope of judicial interference at the stage of a Section 11 petition. Section 11(6A) limits judicial interference under Section 11 only to the extent of determining the existence of an arbitration clause. Interpreting the term “existence of an arbitration agreement” in section 11(6A), the SC in Drolia had reasoned that the existence of an arbitration agreement presupposed its validity. The court had undertaken a contextual interpretation of the provision to justify its stance. Relying on this interpretation of section 11(6A), the SC in Lombardi sought to justify its exercise of attempting to determine the constitutionality of the clause. The reasoning of the court could be simply understood as follows: Section 11(6A) permits judicial interference only to determine the existence of the arbitration agreement. However, according to Drolia, such existence presupposes its validity. Now, something that is not constitutional cannot be valid and therefore cannot exist. So, to determine the existence of the impugned arbitration clause, the court would also have to evaluate its validity which, in this case, meant testing the clause on the anvil of Article 14.
Secondly, Lombardi relied on the case of ICOMM Tele, where the court had invalidated an arbitration clause containing a similar pre-deposit condition on the ground that it was arbitrary and violated Article 14. In the present judgement, the SC thus relied on this case to provide support for its decision that the impugned arbitration clause was unconstitutional (para 42). Thirdly, the court relied on the case of TRF Limited to opine that Lombardi was not the first time that the SC had been called upon to test the constitutionality of an arbitration clause in a section 11(6) application. Lastly, the court relied on Kelsen’s theory to reason that the arbitration clause must be in consonance with two things - the Act and the ‘Grundnorm.’
III. Shaky Foundations: Everything That is Wrong with Placing Reliance on Drolia
The central argument of this section is that the court’s reliance on the three above-mentioned precedents was mis-placed. To begin with, consider the case of Drolia, which was a reference to a three-judge bench from the case of Himangni Enterprises. In its discussion on the scope of judicial interference under Section 11, the court in Drolia undertook a contextual interpretation of Section 11(6A) to hold that the existence and validity of an arbitration agreement were intertwined [para 95]. It is on this basis that the court in the present judgement justified its interference at a Section 11 stage.
However, there are four major problems with this. Firstly, the correctness of these observations of the SC in Drolia were doubted in a subsequent 3-Judge bench decision in NN Global 1 (para 6.12). Although NN Global 1 was overruled by a five-judge bench in NN Global II, the principles propounded by the SC in the former have now effectively been reaffirmed by a 7-Judge bench of the SC in the case of In Re, where the SC dealt with the issue of determining the validity of an unstamped arbitration agreement at a Section 11 stage. Two important things emerge from In Re - firstly, the court expressly overruled NN Global II, and secondly, the court seemed to have intended to limit the ratio of Drolia to the particular context in which it was delivered, as it observed that Drolia did not deal with the subject matter with which it was concerned, i.e., the validity of an unstamped arbitration agreement (para 223). So, the reliance on Drolia to justify the evaluation of an arbitration clause’s constitutionality under a Section 11 application is not a sound exercise.
Secondly, while the legislature has given the Supreme Court the power to prima facie determine the validity of an arbitration agreement under Section 8 of the Act, it has consciously chosen to not use the word “validity” in Section 11 (6A), and instead used “existence”. This indicates that there must be some qualitative distinction between the meaning of the terms. Since these two terms are neither defined in the Act nor in the General Clauses Act, 1897, and going by the literal meaning of the terms “existence” and “validity”, it is reasonably clear that the two have come to occupy different meanings in the English language. The Cambridge dictionary defines the term “existence” as the state of “something being present” while “validity” has been defined as “something which has a legal force”. Similarly, the Black’s Law Dictionary also defines “existence” as something “which is in present force” while “validity” has been defined to mean something which “signifies legal sufficiency, in contradistinction to mere regularity”. Thus, at this stage itself, it is clear that “validity” is something that requires the satisfaction of a higher legal threshold than mere “existence.” So, the legislature seems to have deliberately used the term “existence” as opposed to “validity”, so that the standard of review in a Section 11 application is not as rigorous as it might be under Section 8.
Thirdly, in Drolia, the court directly adopted a contextual interpretation of Section 11(6A). It noted that a plain and legalistic meaning of the term “existence” would be contrary to the contextual background of the provision and might cause “unpalatable consequences” (para 92). The court, however, did not explain what it meant by ‘unpalatable consequences.’ The only reason the court gave to adopt a contextual interpretation was that parties could otherwise sue and claim rights based on an unenforceable agreement.
However, this is a question that needs to be decided by the tribunal under Section 16 and not the court, as it concerns the very jurisdiction of the tribunal. Whether an issue falls within the jurisdiction of the tribunal or not had been answered in the case of Uttarakhand v. NCF where the SC had observed that, for instance, the question of limitation cannot be determined by a court under Section 11, as itis a mixed question of fact and law (para 9.12). Similarly, the determination of the validity of an arbitration agreement requires the court to examine the merits of the case and indulge in a detailed examination of the facts. In the context of Lombardi, the factual considerations would involve examining the complicated question of whether the pre-conditions were even in the nature of non-refundable deposits to begin with, or whether they could be seen as security deposits, in which case the agreement would not have been arbitrary. Therefore, the question of validity of an arbitration agreement is a jurisdictional issue that needs to be decided by the tribunal. In another case, it was observed by the Delhi HC that “the plea of insufficiency of Stamp Duty, touching upon the question of the validity of the Loan Agreements, is a jurisdictional issue” (para 11).[1] In this case, the Delhi HC had left it for the tribunal to decide the validity of the main contract containing the arbitration agreement, observing that the question of validity was a question of jurisdiction. Therefore, it held that the issue fell squarely within the tribunal’s jurisdiction under Section 16 of the Act, and that the intervention of the court was not justified.
Further, the law on interpretation of a statute is settled- “Where wordings of a statute are absolutely clear and unambiguous, rule of literal construction is to be applied and recourse to other principles of interpretation is not required.”[2] Only when literal construction results in some absurdity or anomaly, other principles of interpretation may be applied. In Drolia, the court did not clarify how the literal construction of the term “existence” would have led to an absurdity. Even otherwise, incontextual interpretation, each provision has to be construed in light of the whole statute. For instance, in this case, in adopting a contextual interpretation of the impugned provision, the SC took into consideration the objects and purposes of the statute. So, assuming but not conceding that contextual interpretation of Section 11(6A) was indeed required, the court should have adopted a construction which furthered the intention of the legislature in bringing about such a provision. Section 11(6A) was brought in by the legislature in response to a slew of judgements like SMS Tea, where the courts expanded the scope of judicial interference under a Section 11 application. Therefore, the legislature introduced a non-obstante clause stating, “notwithstanding any judgment, decree or order of any Court”, the court’s examination under a section 11 application must be limited only to the extent of examination of existence of an arbitration clause and nothing more. Notably, the 246th Law Commission Report had also observed that there was a need for curtailing the scope of judicial interference at a Section 11 stage “to situations where the Court/Judicial Authority finds that the arbitration agreement does not exist or is null and void.” Significantly, the legislature did not incorporate the terms “or is null and void” in section 11 (6A), thus only permitting judicial interference to the extent of examining the “existence of the arbitration agreement.”
It is thus no surprise that a 3-Judge bench of the SC in Mayavati Trading (P) Ltd. v. Praduyat observed that examination of the existence of an arbitration agreement under Section 11 had to be understood in the narrowest sense. In fact, this principle was reiterated in the case of In Re, where the SC observed that “Parliament intended to confine the jurisdiction of the courts at the pre-arbitral stage to as minimum a level as possible” (para 144). All this goes to show that the purpose behind introducing Section 11(6A) was to limit the scope of judicial interference under a Section 11 application. Therefore, a contextual interpretation should also have furthered this objective of the provision, which Drolia failed to do by expanding the scope of interference.
Lastly, the court in the case of In Re had also discarded the very basis of Drolia’s reasoning on the grounds that it conflated existence and validity. The court rightly pointed out that the reasoning in Drolia was based on the presumption that Section 11(6A) had been removed from the Act by virtue of the 2019 Amendment to the Act (para 151). However, what the court in Drolia overlooked was that the omission of Section 11(6A) was in fact not notified, and hence that the provision continued to operate with full force. Therefore, the court held that this presumption in Drolia was erroneous, and that the courts needed to give full effect to the legislative intent behind Section 11(6A) (para 152). It further observed that “the scope of examination under Section 11(6A) should be confined to the existence of an arbitration agreement on the basis of Section 7. Similarly, the validity of an arbitration agreement, in view of Section 7, should be restricted to the requirement of formal validity such as the requirement that the agreement be in writing” (para 154). Therefore, I submit that it is reasonable to argue, with the benefit of hindsight, that the reliance on Drolia to justify the examination of the constitutionality of the arbitration clause was erroneous.
IV. Shaky Foundations: Misguided Reliance on ICOMM and TRF Limited
Once the court grounded its power to interfere on Drolia, it relied on ICOMM v. Punjab to suggest that this was not the first time the SC had held an arbitration clause to be unconstitutional for being arbitrary. The problem however is simple. Since the court proceeded with the assumption that its interference has been solidly backed up by Drolia’s reasoning, it then placed significant emphasis on the case of ICOMM to suggest that it was not the first time that the SC had held an arbitration clause to be unconstitutional for violating Article 14 (para 42). What the SC, however, seems to have overlooked is that the judgement in ICOMM was delivered by the SC in exercise of its powers under Article 136 of the Constitution as ICOMM case was filed in the form of an Special Leave Petition (SLP) challenging the order of the High Court in a Writ Petition. Notably, this provision vests plenary jurisdiction in the SC, and the Constitution does not in any way choose to fetter or circumscribe the powers exercisable under this Article.[3] It is thus an extraordinary jurisdiction, vested with implicit trust and faith by the Constitution in the Supreme Court.
In Lombardi, on the other hand, the court was exercising its powers under Section 11 of the Act, which expressly limits the scope of judicial interference to as low a quantum as possible. The constraints that Section 11 places on the powers of the SC are absent when the SC derives its powers under Article 136. So, the real issue should not have been whether the SC had previously invalidated an arbitration agreement for being unconstitutional, but rather, whether it was possible to do so under Section 11 of the Act. Therefore, what the SC did in ICOMM was completely different and clearly distinguishable.
Similarly, the court later relied on the case of TRF Limited to seemingly suggest that even under a Section 11 application, the court can evaluate if the arbitration agreement is invalid by “operation of law”, and that this was a wide phrase covering the Constitution and all Central and State Laws. This implies that the arbitration agreement can be tested for its consistency with the Constitution as well as Central and State laws even at a Section 11 stage. There are two problems with this reasoning. Firstly, the reliance on TRF Limited was misplaced. In TRF, the issue was whether a Managing-Director (MD) required to arbitrate the disputes, who had become ineligible by operation of law, was be able to nominate an arbitrator. The SC answered this question in the negative by referring to Section 12(5) of the Act, whose operation made the MD ineligible to nominate another arbitrator. However, nowhere did the court define the term “law” as used in the phrase “operation of law” to include the Constitution and other Central or State Laws. All the references to ‘law’ in that case were limited references to Section 12(5) of the Act itself, and nothing more. So, it is unclear how the SC in the present case concluded that “law” had a wide connotation that included even the Constitution and other laws.
Moreover, the consequences of such an interpretation are not tenable. Such an interpretation would imply that even under a Section 11 application, for instance, a court could hold an unstamped arbitration agreement to be invalid, as such an agreement would be in violation of The Indian Stamp Act 1899, a central law. However, the court in In Re categorically held that such a determination is to be made by the tribunal and not the court, due to the principle of separability presumption enshrined in Section 16 of the Act.
V. Conclusion
The analysis above argues that the judgement in Lombardi does not possess a solid footing in Indian jurisprudence. The reliance on case-law to justify the increased level of judicial interference at a Section 11 stage seems counterintuitive. Instead of further simplifying arbitration as a means of dispute resolution, it might lead to several transaction costs in terms of litigation expenses. This is so because the judgement has now paved the way for parties to challenge the very constitutionality of arbitration agreements even under a Section 11 application. This increased scope of judicial interference at a pre-arbitral stage not only increases the transaction costs for the parties, but also runs counter to the principle of arbitral autonomy enshrined in Section 16 of the Act. Therefore, this article presents a case for reviewing the judgement expeditiously.
[1] Religare Finvest Ltd. v. Asian Satellite Broadcast (P) Ltd. (2022) SCC OnLine Del 221.
[2] Dr Avtar Singh and Dr Harpreet Kaur Introduction to the Interpretation of Statutes (LexisNexis 5th ed).
[3] D.D. Basu, Commentary on the Constitution of India, (9th ed, Vol 9, Articles 124 – 214).
Akash Surya is a current Third Year - B.A., LL.B. (Hons.) student at the National Law School of India University (NLSIU), Bengaluru.
