Crossing the Lakshman Rekha: A Judicial Critique of the Referral Court’s Powers in MIOT Hospitals

The decision in MIOT case, rather than being an order under Section 11(6), is in fact an arbitral award based upon sound reasoning and after consideration of all relevant material.

Introduction

The High Court, when exercising powers under any section of the Arbitration and Conciliation Act, 1996 (Arbitration Act), acts as a Special Court in terms of Section 2(1)(e), Arbitration Act. Therefore, it essentially makes the High Court a Special Court in each matter, in terms of each section of the Act. Acting under the jurisdiction of Section 11, Arbitration Act, the decision of the Madras High Court in MIOT Hospitals (P) Ltd. v. Balaraman Palaniappan (hereinafter referred to as, “MIOT”)¹ is rather surprising. In our opinion, since the inception of Special Acts one like Arbitration and Conciliation Act, 1996, the Constitutional Courts, such as High Courts have been conferred with additional responsibilities and roles. Such as when a petition under Section 9, Arbitration Act, comes before the court it acts like a court which ought to pass interim protection and no more. Similarly, when an application under Section 11 is presented before the court, it is expected to work only as the “appointee of arbitrator” Court and no more or no less. The judicial precedents, which are discussed below make the amount of interference allowed by the courts under Section 11, Arbitration Act. Therefore, no matter how much ever the interference at Section 11 feels morally right, anything which exceeds the statutorily prescribed interference as interpreted by judicial precedents would always cross the holy line of exceeding the scope, which would amount to overreach. As on date of this article, an appeal against this order has been filed before the Supreme Court and the Supreme Court has ordered status quo.² This presents an interesting opportunity to the Supreme Court to authoritatively and categorically curb the increasing trend of aggrandisement by the Reference Court and lay down a clear “lakshman rekha”. As on date of this article, the Supreme Court still has not passed any final orders in the appeal.

The MIOT petition

The prologue, narrative and epilogue of the MIOT case³ are fairly simple. Going by the order of the High Court, the petitioner, M/s MIOT Hospitals (P) Ltd. (hereinafter referred to as, “hospital”), runs and operates a hospital in Chennai. For their hospital, M/s MIOT were looking for cardiothoracic surgeons to be deployed for short and long-term overseas secondments. In the course of their search, they had encountered the respondent, Dr Balaram Palaniappan (hereinafter referred to as, “doctor”) and after being satisfied about the competence of the respondent, M/s MIOT and the doctor had sent a job offer letter on 2 September 2022. The doctor accepted this offer and the parties had entered into a professional agreement dated 8 September 2022 and the doctor was appointed as a consultant cardiothoracic surgeon. The contract had a non-compete clause in Clause 8.3 of the agreement which prescribed a three-year post-termination non-compete whereby the doctor agrees to not work for any rival hospital within a 15 km radius. The agreement also contained a termination clause in Clauses 10 and 10.2 permitted the doctor to terminate the agreement by giving either a three months’ notice or by paying three months professional fee in lieu of such notice. The doctor had apparently given a resignation letter on 29 January 2024 but M/s MIOT made a request to undertake an assignment in Fiji which was obliged by the doctor. The doctor had thereafter sent another email on 19 April 2025 (prior to the expiry of the three-year period under the contract) expressing his intention to resign from M/s MIOT for various personal reasons, and effectively and unilaterally terminated the agreement. M/s MIOT replied stating that the doctor had to either give three months’ notice or three months payment in lieu of such notice. Thereafter, it was observed that the doctor had taken up employment with a rival hospital in Chennai. Eventually there was an exchange of notices which eventually led to a Section 21 notice being issued by M/s MIOT on 4 July 2025. Thereafter, the petitioner had filed a petition under Section 11(6) seeking appointment of an arbitrator.

The petition under Section 11(6) came to be dismissed with costs of Rs 1,00,000 and the High Court rendered a finding that the agreement is hit by Sections 23 and 27, Contract Act, 1872 and therefore it is void ab initio. It would found that the doctors cannot be treated as employees as they render professional service. Furthermore, the High Court had rendered findings of fact and determined the issue pertaining to the three-month notice period in the Section 11(6) petition and ultimately, after rendering a definitive factual finding, held that there was no longer any further dispute to be resolved before the Arbitral Tribunal. Interestingly, the MIOT⁴decision has not even mentioned an iota of discussion or even the arbitral clause as per the agreement between the parties to the lis. In essence, Section 11 court decided all the points except the primary consideration it is ought to have taken up.

The decision in MIOT case, rather than being an order under Section 11(6), is in fact an arbitral award based upon sound reasoning and after consideration of all relevant material. With a crucial pivot, we deem it necessary to state that recently Madras High Court deemed a Section 16 to be an interim award based on the findings that overstepped upon the merits and defence of the parties involved in the case and entertain Section 34 against the dismissal of Section 16 order deeming it to be the interim award [See: United India Insurance Co. Ltd. v. Targos Chemicals India (P) Ltd.⁵]. However, when the same was challenged, the Supreme Court, directed the parties to go back to the arbitrator and raise all the claims made in Section 34 before the arbitrator and in effect set aside the whole Section 34 proceedings.⁶ This goes on to show that even the Arbitral Tribunal, which by law has the right to decide upon the merits of the matter, cannot do so in a specific application filed challenging its jurisdiction under Section 16. Therefore, by any stretch of the imagination it cannot be said that Section 11 court should be vested with such powers, no matter how well the equities are required to be balanced. Based on the limited facts as seen from the judgment itself, few can doubt the correctness of the findings, but the authors instead argue that such findings, regardless of its merits, amounts to judicial overreach, and is inconsistent with the powers available to a Referral Court under Section 11. The judgment in the case of MIOT is not an isolated incident but is in fact a growing trend of the Reference Court trying to judicially wrestle back some of the powers it exercised prior to the 2015 Amendment. The authors contend that a series of judgments slowly but steadily increasing the powers of the Reference Court is leading to the unenviable position of bringing back the pre-2015 regime and is a direct affront to the legislative policy and party autonomy.

Scope of judicial enquiry under Section 11

The scope of Section 11 was the subject-matter of much debate. The legislature thought to end the debate once and for all with the 2015 Amendment and to some extent, it was able to clear up the muddy waters. The 2015 Amendment introduced Section 11(6-A) and the clear legislative intent was to confine the scope of enquiry under Section 11(4), (5) and (6) to the examination of “existence of arbitration agreement” alone. The 2015 Amendment came to be considered by the Supreme Court in Duro Felguera, S.A. v. Gangavaram Port Ltd.⁷ and Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman⁸. The Supreme Court, taking into consideration Section 11(6-A) stated that the scope of examination after the 2015 Amendment is restricted to examination as to whether an arbitration agreement exists, nothing more and nothing less. In fact, in Mayavati Trading case, the Supreme Court expressly disapproved of the Reference Court entering into an enquiry as to accord and satisfaction at the stage of reference. Unfortunately, as we will see later in this article, this position has been significantly diluted by a subsequent judgment of the Supreme Court. The same principle of minimal judicial interference and mere prima facie determination of the existence of an arbitration agreement test was once again recently reiterated by the Supreme Court in Goqii Technologies (P) Ltd. v. Sokrati Technologies (P) Ltd.⁹

Despite the clear statutory language, the scope of judicial enquiry that can be exercised by a Reference Court has now been expanded. Broadly speaking, prior to the decision in MIOT case¹⁰, we could identify the following broad scope of enquiry that could be conducted by the Reference Court:

1. The existence of an arbitration agreement. [Section 11(6-A)].

2. The formal validity of the arbitration agreement under Section 7, i.e., restricted to examination of whether the arbitration agreement is in writing; [Interplay Between Arbitration Agreements under Arbitration Act, 1996 & Stamp Act, 1899, In re (In re Stamp Act)¹¹].

3. Whether the disputes are ex facie barred by limitation; [BSNL v. Nortel Networks (India) (P) Ltd.¹²].

4. Whether the Section 11 petition is barred by limitation; [Nortel]

5. In fact, in another recent judgment of A.P. Power Generation Corpn. Ltd. v. Tecpro Systems Ltd.¹³, the Supreme Court reiterated the discipline of the Referral Court to adhere to prima facie enquiry refrain from taking detailed enquiry with respect to evidence and other aspects at the Section 11 stage.

In addition to the aforesaid, there are two additional circumstances which, though normally must be left to the Arbitral Tribunal, can be considered by the Referral Court. This is borne out of the decisions in Vidya Drolia v. Durga Trading Corpn.¹⁴ wherein it was held that though the issue of non-arbitrability is normally only to be decided by the Arbitral Tribunal, rarely, as a demurrer, the Referral Court in cases where it is manifestly and ex facie certain that arbitration agreement is non-existent, invalid or non-arbitrable can adjudicate and refuse to refer parties to the arbitration. This principle was further extended in Indian Oil Corpn. Ltd. v. NCC Ltd. (NCC)¹⁵ to exercise a “prima facie review” at the stage of reference to weed out any frivolous or vexatious claims. Having held thus, the Supreme Court in the case of NCC proceeded to hold that the Reference Court can look into aspects such as “accord and satisfaction”, something which was expressly held to be impermissible by a Bench of larger strength in Mayavati Trading case¹⁶, and whether the dispute falls within the excepted matters clause of the contract.

To complete the precedential survey on this issue, thereafter a seven-Judge Bench of the Supreme Court in In re Stamp Act case¹⁷ have further reinforced and reaffirmed the limited judicial review as mandated under Section 11(6-A). In light of this decision, it must be seen as to whether the overarching principles of NCC still holds good.

Judicial critique of the decision in MIOT

The decision in the case of MIOT¹⁸ is now the latest in the increasingly prevalent trend of judicial aggrandisement. The decision in the case of MIOT now permits the parties to undertake a review of the substantive validity, as opposed to formal or procedural validity, of the underlying contract. It also creates a gateway for the Referral Court to render findings on the merits to hold that there is in fact no dispute between the parties. This decision, though well-intentioned, could effectively open the floodgates and restore the pre-2015 position. While ultimately the court might have arrived at the correct conclusion and might have removed the “dead wood”, it sets a dangerous precedent.

In this regard, a small parley into the core tenets of party autonomy and minimum judicial interference is warranted to better understand the scope of power to be exercised by the Reference Court under Section 11. The principle of party autonomy and minimum judicial interference enshrines that individual contracting parties are free to determine and designate a private tribunal to decide any dispute between the parties in respect of the underlying contract. The concept of party autonomy means that the parties can also agree upon the “Arbitral Tribunal” or leave it to be decided on a mutually acceptable basis at a later stage if and when a dispute arises. If, upon a dispute arising between the parties under the underlying contract, the parties are unable to agree upon the composition of Arbitral Tribunal or for other reasons, the parties are permitted to approach the Reference Court to seek constitution of a tribunal. The role of the Reference Court, strictly from a reading of Section 11, appears to be to examine as to whether the parties have in fact agreed to settle their dispute through arbitration, and if so, to appoint an Arbitral Tribunal to decide on the dispute. Probably, given the limited role of the Reference Court, this was the reason why there is no statutory right of appeal provided as against an order passed under Section 11. The only remedy available for an aggrieved party is, in the event the appointment was made by a High Court, to avail the discretionary leave to appeal under Article 136 before the Supreme Court. Thereafter, the parties will operate within the framework of the Arbitration Act, and they will be permitted either to seek for a preliminary determination of validity under Section 16 or undergo the rigmarole of a trial. The culmination of the proceedings in the award permits the unsuccessful party to file a petition for setting aside the award under Section 34 and, if required, under Section 37. Therefore, there are two avenues for the aggrieved parties to air their grievances prior to resorting to the discretionary right of appeal under Article 136 before the Supreme Court. Contrary to the aforesaid, any preliminary or premature determination at the stage of a Section 11 would be in violation of the principle of competence-competence and would also deprive the aggrieved party of any statutory remedy against such findings.

The decision in the case of MIOT¹⁹ has now effectively rendered an award sans statutory recourse for the hospital. In one stroke of the pen, the claims have been determined and an award has been passed by the Referral Court and the contract has been held to be invalid without any oral evidence or cross-examination of any party. To further add salt to injury, costs have also been imposed on the hospital for attempting to appoint an arbitrator for deciding what was a perceived dispute. The only remedy available to them now is to apply for leave to appeal to the Supreme Court under Article 136.

The authors contend that the decision in the case of MIOT is erroneous for the following reasons:

1. The existence of the arbitration agreement is not doubted; in fact, it has not even been considered as a fact in issue.

2. There is no power conferred to the Referral Court to undertake a review on the substantive validity of the underlying contract.

3. Regardless, even substantive invalidity of the underlying contract would still not invalidate the arbitration clause which is a separate contract.

The facts in the case of MIOT is a curious case where though there is no dispute about the existence or formal validity of the arbitration clause in the underlying agreement, but the court has decided on the substantial validity (or invalidity) and refused reference. The extent of review undertaken in the MIOT case would exceed even the wide discretion granted under the NCC case²⁰, as even the NCC case did not permit a substantial enquiry into the validity of the underlying contract. As stated earlier, this will amount to the Referral Court conducting a mini-trial and virtually passing an award and this has been specifically prohibited under In re Stamp Act case ²¹ by a seven-Judge Bench of the Supreme Court.

Further, in the case of MIOT, the court rendered a finding that since the contract was found to be in contravention of Sections 23 and 27, the contract itself is void ab initio and the arbitration clause contained therein cannot survive. To support this conclusion, the court also relied upon the decision in Shin Satellite Public Co. Ltd. v. Jain Studios Ltd.²² This finding appears to be in the teeth of the finding of the seven Judges of the Supreme Court in In re Stamp Act case²³ which firmly enshrines the doctrine of severability and separability of the arbitration agreement as a separate contract that survives even the invalidity of the underlying contract. It was held that the validity of an arbitration agreement, in the face of invalidity of the underlying contract, would allow the Arbitral Tribunal to assume jurisdiction and decide on its own jurisdiction in line with the principle of competence-competence. Therefore, even if the underlying contract is hit by Sections 23 and 27, the arbitration agreement would survive. This is yet another reason as to why the judicial exercise of an examination of validity of the underlying contract is neither permissible nor necessary.

The reliance on the decision in the case of Shin Satellite is also unclear. Firstly, the judgment was rendered in the pre-2015 Amendment era and therefore, its relevant post-introduction of Section 11(6-A) itself is questionable. Even otherwise, the question that arose for consideration in the case of Shin Satellite was whether an arbitration clause which held that the decision of the arbitrator was final and binding and the parties will waive all right of appeal. It was argued that such clause was in violation of Section 28, Contract Act. Therefore, the question for consideration before the Supreme Court was whether the arbitration clause itself was valid or not and not a question of the validity of the underlying contract. Most importantly, in Shin Satellite case itself, the court went by the test of “substantial severability” and the arbitration clause was upheld by severing the offending part using a “blue pencil”. Therefore, as opposed to supporting its finding, the decision in Shin Satellite case would squarely be against the ratio arrived at in MIOT case²⁴.

Conclusion

Thus, to conclude, MIOT is but the latest entrant in an ever-increasing trend of expanding the jurisdiction and scope of enquiry by a Referral Court. The decision in the case of MIOT, though arguably correct and well-reasoned, could open the floodgates to expansive arguments and mini-trials being conducted at the referral stage and this would render the entire legislative scheme otiose. This decision crosses the lakshman rekha and empowers the Referral Court to don the hat of an arbitrator. This would also have a practical impact as it virtually extinguishes any statutory right of appeal for an aggrieved party against a “quasi award”. Reiterating that while acting under the special statutes as that of the Arbitration Act, the High Court or any other Commercial Court ought to assume the colours of the statute in its true letter and spirit. The court need to let go of its other available powers under other statutes and confine itself within the available four corners of the statutory boundaries and powers. Anything beyond the same would step into a dangerous area of judicial overreach and expanding the jurisdiction of itself by virtue of judicial discretion. This digresses into the violation of principles laid down in R.S. Nayak v. A.R. Antulay²⁵, wherein in context of alteration of appellate right in criminal law it was categorically the power to create or enlarge jurisdiction is legislative in character.