Op EdsOP. ED.

In Part 2, firstly this article shall analyse the existence of an alternative dispute resolution mechanism in India. Secondly, this article shall study various arbitration cases in space-related disputes and conduct a brief comparative analysis to litigation cases in space-related disputes. Thirdly, this article shall suggest the requisite means and measures to improve the dispute resolution mechanism for space-related disputes.

 

  1. Space Law from the Lens of Indian Standpoint: Does any Alternative Dispute Resolution Mechanism Exist at the Domestic Level?

 

In 2017, the Government of India released the Draft Space Activities Bill, 2017. The Government sought for comments on this draft from the public. This Bill addressed the aspect of private participation in the Indian space sector. It essentially acknowledged the importance and the crucial role that the private sector would play in the near future for the development and enhancement of space-related technology for humanity. However, at the same time, substantial discretion was rested in the hands of the Indian State to essentially control the access to outer space. Regardless of this, the Bill emphasised on the creation of a public-private partnership model to meet the future goals of the space sector, alongside Indian Space Research Organisation (ISRO) inviting the private sector to develop the future satellites.

 

However, the point of conundrum arises is that, when we carefully scrutinise the 2017 Bill, we comprehend that powers have been given to the domestic Indian courts whereas there is no mention of resolution of disputes through arbitration, mediation, and/or negotiation. This lack of mention, accompanied by the Arbitration and Conciliation Act, 1996 and the Indian jurisprudence on arbitration, both being in their nascent stages, proves highly detrimental to the resolution of space-related disputes. This is because, even though the parties in space sector have commercial contracts and agreements that may consist of an arbitration clause, it is pertinent to note that not all disputes may be arbitrable. For example, landlord-tenant disputes were not arbitrable in India until 2020 as they dealt with matters related to public policy and interest. This meant that matters which relate to public policy and interest cannot be arbitrated as such arbitration happens in privacy and confidentiality whereas, these matters are to take place in public forums as that of the civil courts. Due to this, there were multiple conflicting decisions of the High Court and the Supreme Court. However, in December 2020, the Supreme Court finally held that the landlord-tenant disputes are arbitrable as they dealt with subordinate rights in personam that arose from rights in rem.[1] All these conflicts and confusion could have been avoided had there have been an explicit mention about resolution of landlord-tenant disputes through arbitration in the Transfer of Property Act, 1882 with the necessary exemptions of State-specific legislations that provide for specific forums for landlord-tenant disputes redressal.

 

Similarly, in the case of space-related disputes, if there is no mention of arbitration about space-related disputes in the 2017 Bill, it may highly lead to heavy turmoil and confusion despite having arbitration clauses in space-related commercial contracts and agreements, thereby hindering the objective of just, effective, and efficient justice. Although the Supreme Court developed a four-pronged guiding test in Vidya Drolia (2) case[2] –– to ascertain which disputes are non-arbitrable –– that can be applied to decide the arbitrability of space-related disputes, it is pertinent to note that there will be a massive time and resource drainage.

 

This drainage will take place because there will be a substantial time and resources drainage and wastage in deciding whether a space–related dispute is arbitrable. If the Court decides that such outer-space disputes are arbitrable, then there is an unnecessary time and resources lag to commence and conclude arbitration proceedings. This lag can cost both the Parties heavily considering outer-space disputes are enormously expensive. Further, if any Party is unsatisfied with the arbitral award, then they would approach the Court to set it aside. This process of setting aside the arbitral award only adds on to the stress of the previous time and resource lag.

 

Or, if the Court decides that such outer-space disputes are non-arbitrable, then resorting to the traditional, tedious litigation process for adjudication of that space–related dispute and/or getting the previous judgment, that outer–space disputes are non-arbitrable, reviewed by a higher Court/Bench, causes similar time and resources detriment to both the Parties.

 

  1. Study of Arbitration in Space-Related Disputes with a Comparative Analysis of Outer Space Litigation

 

As previously mentioned, the types of space-related disputes may be, but not limited to, late delivery of satellites, problem regarding the launch of a satellite, defective satellites in the orbit, sale and purchase of satellites in the orbit, lease of satellite capacity, right to operate at certain orbital positions, revocation of leased spectrum, and reservation of capacity for governmental use. Thus, taking the aforementioned into consideration, certain arbitration case laws shall be scrutinised for better comprehension.

 

Firstly, the case of Spacecom v. Israel Aerospace Industries was a dispute regarding late delivery of satellites.[3] In this case, Israel Aerospace Industries was supposed to build a satellite for Spacecom and deliver the same by August 2015. However, there were certain delays due to which the satellite was delivered to Spacecom by September 2016. Further, during a prelaunch test, this newly delivered satellite disintegrated. Spacecom initiated arbitration proceedings against Israel Aerospace Industries wherein Spacecom secured an award of USD 10 million in its favour.

 

Secondly, the case of Avanti Communications Group v. Space Exploration Technologies was a dispute regarding launch of satellites.[4] In this case, Avanti contracted with Space Exploration Technologies (hereinafter “SpaceX”) wherein Avanti’s satellite was to be launched aboard a SpaceX Falcon 9 launch vehicle. In pursuance to this contract, SpaceX was mandated to show a certain number of successfully completed launches for their launch vehicle, which they failed to show. Due to this failure, Avanti terminated the contract with SpaceX and requested for a refund as Avanti had already paid the launch cost deposit of USD 7.6 million to SpaceX. SpaceX denied refunding the same amount and Avanti initiated arbitration proceedings against Space X wherein Avanti secured an arbitral award of USD 7.6 million in its favour.

 

Thirdly, the case of Thuraya Satellite Telecommunications v. Boeing Satellite Systems International was a dispute regarding defective satellites in the orbit.[5] Generally, satellite manufacturer’s liability stops from the launch of the satellite. However, in this particular case, a group of insurers brought a claim against Boeing as Boeing’s manufactured satellite lost power in the orbit due to the alleged defective solar panels. Boeing acknowledged that its earlier satellite models contained defects; however, it said that it was not aware about these problems before such satellites were launched and denied concealing such defects from the purchasers of its satellites. The Arbitral Tribunal rejected the insurers’ claim and ordered them to pay Boeing’s full “costs”.

 

Fourthly, the case of ABS v. KT Corpn.[6] was a dispute regarding sale and purchase of satellites in orbit. In this case, ABS contracted with KT Corporation and KTSAT (hereinafter “KT”) for the purchase of a satellite from KT. This satellite was purchased with the requisite US regulatory approvals, but not any Korean regulatory approvals. In 2011, KT delivered the satellite to ABS wherein ABS paid the requisite purchase price of USD 500 million. However, in 2013, Korea’s Ministry of Science, ICT and Future Planning (hereinafter “MSIP”) declared the contract –– between KT and ABS –– as null and void as KT did not comply with Korean regulatory approval. Further, KT was ordered for returning the satellite to its original operating condition. Due to this, KT sent a letter to ABS wherein KT asserted its ownership of the satellite. However, ABS denied the same on two counts: (i) MSIP did not have the authority to nullify the contract between KT and ABS; and (ii) Korean export approval was not necessary because the satellite was not a Korean export but a US export. ABS initiated arbitration proceedings against KT and secured an arbitral award in its favour wherein the title was declared to have been transferred to ABS even before the MSIP nullified the contract. This was because:

 

… ABS and KT fulfilled every prerequisite defined in Article 10.1 of the purchase contract as a condition precedent to the passage of title to the satellite: obtaining export approval by KT and Lockheed Martin for a US export under the regime of the US International Traffic in Arms Regulations (ITAR), delivery of the satellite, payment of the purchase price and issuing of bills of sale.[7]

 

Further, the Arbitral Tribunal also held that the Korean Government did not have any authority to nullify the contract as it held that MSIP was not the competent agency to issue an order of nullification, but the Korean Ministry of Trade, Industry and Energy was competent that remained silent throughout the matter.

 

Fifthly, the case of Avanti Communications v. Govt. of Indonesia was a dispute regarding leasing of satellite capacity.[8] In this case, Indonesia’s satellite malfunctioned in 2015 due to which Indonesia could have lost its orbital slot. The filling of this orbital slot with a new satellite would have taken more than three years but this was problematic to Indonesia because, according to the “use it or lose it” policy, a State may lose its orbital slot if the State leaves the orbital slot vacant for more than three years.[9] To avoid the same conundrum, Indonesia leased capacity on another satellite that could be brought and maintained in Indonesia’s orbital slot until a new Indonesian satellite could be placed. This replacement satellite was owned by Avanti. The lease capacity agreement was worth USD 30 million. Indonesia paid only USD 12 million, leaving a remaining balance of USD 16.8 million as it claimed that the satellite was not fulfilling the requisite purpose. Failure to pay even after a year, due to this, Avanti initiated arbitration proceedings against Indonesia in 2017 and secured an arbitral award in its favour in 2018 wherein Indonesia was ordered to pay Avanti a total sum of USD 20.075 million.

 

Sixthly, the case of Eutelsat SA v. United Mexican States[10] is a dispute regarding reservation of capacity for governmental use. In this case, Eutelsat, a satellite operator, acquired a satellite in 2014. However, according to the regulatory rules of United Mexican States i.e. Mexico, satellite operators are mandated to reserve ninety per cent of their satellite’s overall capacity for governmental use, which the operators could otherwise commercialise. The problem arose at the point wherein Eutelsat claims that it was required to reserve a larger capacity for Mexican Government than its competitors which, in turn, violated the principle of fair and equitable standard under the Mexico-France Bilateral Investment Treaty (BIT). The case is still pending.

 

Seventhly and in finality, there are two noteworthy arbitral disputes that are the Devas arbitrations[11] and the Eutelsat arbitrations[12] that relate to revocation of lease spectrum and the right to operate at orbital positions respectively.

 

Thus, considering the aforementioned cases, it is lucidly evident that a plethora of international arbitration cases have taken place that are related to a conventional manufacturing, purchase, title, or contract-related dispute.

 

However, the query is that whether litigation takes places for space-related disputes. The answer is affirmative as already evident from the 1991 case of Martin Marietta Corpn. v. Intelsat.[13] In this case, Martin Corporation (hereinafter “Martin”) and Intelsat entered into an agreement to launch two satellites. Martin agreed to launch the satellites in return for a consideration worth USD 112 million from Intelsat. Soon after the lift off of the first launch, the payload’s separation system failed to eject the satellite and the satellite’s booster. Although Intelsat’s engineers eventually separated the payload from the rocket, this delay caused in the separation of the payload from the rocket left the satellite in a useless orbit. It was estimated that the cost to rescue and place the satellite in a proper orbit was USD 90 million due to which Martin filed a case in Maryland District Court. In response to this, Intelsat filed a counter case claiming a breach of contract. Further, Intelsat also brought the claims of negligent misrepresentation, negligence and gross negligence to recover the damages for loss of profits, loss of use of satellite, and rescue costs. The District Court’s case lasted for a significant period of time, but it did not end there as the case went to appeal to the Fourth Circuit that disagreed on the District Court’s decision on multiple counts.

 

Thus, the point of consideration, rather than a conundrum, arises is that this significant time and resource lapse, alongside changing decisions of the courts, in Martin case[14], could have been avoided had the matter been referred to arbitration proceedings as arbitration would have not only offered a higher chance at time and resource savings, but also mutual development and agreement for the claim amounts, thereby enabling the development of sustainable and long-lasting relationship between the parties. Similar problems have arisen in the space-related litigation disputes of Appalachian Insurance Co. v. McDonnell Douglas Corpn.[15] and Lexington Insurance v. McDonnell Douglas.[16]

 

Thus, it is lucidly evident that litigation proceedings in already complex and highly technical space-related disputes add on to the existing layers of complexity. Further, it also leads to massive cost and resource drainage and wastage which, in turn, further detriments the space sector from gaining traction in terms of growth, development, and innovation. Therefore, arbitration, mediation and/or negotiation offer the best chance at saving time and resources alongside building long-lasting and sustainable commercial relationships which, in turn, enable the space sector to bloom while protecting its manufacturers, sellers, and service providers.

 

In the following, the author shall conclude with certain recommendations to improve the scenario of dispute resolution in space-–related disputes.

 

  1. Conclusion: What is Actually Written in the Stars for the Future of Dispute Resolution Mechanism in Space-Related Disputes

 

We comprehend that the disputes in the space sector are highly technical and complex in nature due to which the need for arbitration substantially rises and for litigation reduces. However, it is pertinent to note that, in the space sector, the disputes are usually resolved through the process of mediation.[17] The parties resort to arbitration only if the matter escalates.[18] Taking this into account, it can be inferred that mediation is quintessential to resolve space-related disputes. However, considering the fact that the conventions and accords regarding space law are obsolete and ineffective, an imperative need to update and upgrade the same becomes the need of the hour because failure to do so will obstruct in the delivery of justice to the parties. The reason behind the same is that there is a burning need to develop a dispute resolution mechanism that is akin to space-related disputes only, rather than resorting to a general and standard dispute resolution mechanism as previously argued.

 

Thus, firstly, a new, effective, and efficient dispute resolution mechanism of arbitration, mediation, and negotiation (hereinafter “AMN”) can be developed through a top-to-down approach (hereinafter “TDA”). This means that that the law and its related provisions shall flow from the lawmakers to the parties wherein the updation and upgradation of the related conventions, treaties, and accords, alongside the development of specific rules and procedures shall be the responsibility of the lawmakers. It shall involve inclusion of specific and comprehensive provisions related to the dispute resolution mechanism of AMN in the newly updated and upgraded conventions, treaties, accords, and so on. Further, the relevant and requisite suggestions/amendments may be sought from various actors of the space sector for a comprehensive and inclusive development of the dispute resolution mechanism. This approach takes precedence over a down-to-top approach (hereinafter “DTA”) wherein the law and its related provisions flow between the parties while ensuring adherence to the general norms of international law. In other words, in DTA, the parties shall set their own rights, duties, and obligations, while ensuring that such setting does not violate any basic provisions of international law such as justice, fairness, equality, and good faith. DTA is not a preferrable mode because in this approach, there is a lack of uniformity and standardisation in the rights, duties, and obligations of the parties. This lack of uniformity and standardisation may inherently lead to the creation of stark differential treatment for each AMN proceedings which, in turn, may be perceived as discriminatory. Thus, to avoid the same, TDA is preferrable for the creation of an AMN dispute resolution mechanism.

 

Adding on to the aforementioned updation and upgradation of the treaties and so on, it is of quintessence importance for us to comprehend that the PCA Outer Space Arbitration Rules already exist for the purpose of arbitration in space-related disputes. Considering the dynamic and rapid changes in the space sector, wherein the probability of space-related disputes exponentially rise in times of Covid-19 — owing to halt and delay in various businesses and their ancillary industries — the need for utilising and applying these Rules becomes inevitable. This is to ensure faster, effective, and efficient redressal of space-related disputes owing to these Rules expertise and specific draft for space-related disputes. However, to achieve the same, there is a need for creating an awareness regarding these Rules within the space sector. Further, these Rules scope can also be expanded by including provisions and measures for mediation and/or negotiation. The benefit of the same would essentially be of standardisation and uniformity in the Rules for dispute resolution mechanisms as earlier argued.

 

Secondly, it is also imperative for us to comprehend that if the parties choose to go for litigation, then they may choose to go for the International Court of Justice (hereinafter “ICJ”) ad hoc litigation rather than a traditional ICJ litigation. The reason behind the same is that, in the ICJ Statute, there is a provision that enables the creation of ad hoc litigation chambers of the ICJ.[19] According to Article 26 of the ICJ Statute, we comprehend that it enables the creation of two types of chambers: a chamber that deals with a particular case;[20] or one or more chambers that deal with a particular “category” of cases.[21] Thus, we need to comprehend that this type of ad hoc ICJ litigation is far more beneficial than a traditional ICJ litigation because: (i) the ad hoc chambers will be specially equipped with experience and expertise to deal with space-sector related disputes as Article 26(1) enables the creation of chambers for a particular category of cases. This benefit of experience and expertise shall enable ICJ to deliver judgments of higher effectiveness and efficiency which, in turn, will enable the parties to receive appropriate and speedy justice. (ii) Ad hoc chambers act in a manner similar to that of Arbitral Tribunals because these chambers are created especially for specific disputes which is the same case in Arbitral Tribunals. This essentially offers similar benefits of Arbitral Tribunal but in the form of a decision rendered by an ICJ chamber. Further, it is also quintessential to note that these ad hoc chambers decisions are considered as a judgment rendered by the ICJ[22] which, in turn, makes it binding on the parties as per Article 59[23] and thereby increases the authenticity of these decisions.

 

However, the advantages of an ad hoc ICJ chamber over an Arbitral Tribunal must be discussed. These advantages are as follows: (i) From a political standpoint, it has already been observed that ICJ judgments have a higher visibility than an Arbitral Tribunal which, in turn, creates an increased probability of compliance with these judgments.[24] Further, these ICJ judgments are termed as “more prestigious” when compared to arbitral awards.[25] This, in turn, enables a party to bring the other party under the accountability and responsibility factor which may be due to the other party’s inability to fully or partially comply with the judgment. (ii) An ad hoc ICJ litigation chamber is comparatively lesser expensive than an Arbitral Tribunal because, according to Article 33, the “expenses” of the ICJ proceedings shall be borne by ICJ. The parties would be required to only bear their “own costs” for the ICJ proceedings. This encourages small actors of space-related disputes to undertake the same proceedings. Thus, it is lucidly evident that the parties can also resort to ad hoc ICJ litigation, provided the mutual settlement talks and/or mediation and/or arbitration has failed between them.

 

Therefore, considering the fact that there are ample amounts of opportunity for the dispute resolution mechanism for space-related disputes to grow, develop, and evolve, an inevitable need for constant updation and upgradation of the laws and rules arises alongside the creation of an awareness regarding the same.


† Iram Majid, Director of Indian Institute of Arbitration and Mediation (ILAM) and Executive Director of Asia Pacific Centre for Arbitration and Mediation.

[1] Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 : 2020 SCC OnLine SC 1018.

[2] Ibid.

[3] Jan Frohloff, Arbitration in Space Disputes, 35 Arbitration Int’l 309, 311 (2019).

[4] Id. at 311-312.

[5] Id. at 313.

[6] ICC Case 19958/ AGF/RD/MK (ABS).

[7] Frohloff, supra note 2, at 315.

[8] Id. at 316.

[9] Id. at 317.

[10] ICSID Case No. ARB(AF)/17/2.

[11] See also CC/Devas (Mauritius) Ltd. v. Republic of India, PCA Case No 2013-09 and Devas Multimedia (P) Ltd. v. Antrix Corpn. Ltd., ICC Case 18051/CYK.

[12] See also Eutelsat v. Media Broadcast, Deutsche Telekom; Eutelsat v. SES (Eutelsat) <https://www.international-arbitration-attorney.com/icc-space-arbitration-eutelsat-communications-v-ses/>.

[13] 763 F Supp 1327 (D Md 1991).

[14] Ibid.

[15] 262 Cal Rptr 716, 718 (Cal Ct App 1989).

[16] 49 USC app § 2615 (1988).

[17] Frohloff, supra note 2, at 328.

[18] Ibid.

[19] 1945 3 Bevans 1179, Art. 26 (hereinafter “ICJ Statute”).

[20] Id. at Art. 26(2).

[21] Id. at Art. 26(1).

[22] Id. at Art. 27.

[23] Id. at Art. 59.

[24] Andreas Zimmermann, Ad Hoc Chambers of the International Court of Justice, 8(1) Dickinson Journal of International Law 9, 1-32 (1989).

[25] Ibid.

Advani & Co.Experts Corner

 

Introduction

 

The seminal judgment of the 3-Judge Bench of the Supreme Court of India in Vidya Drolia v. Durga Trading Corpn.[1] (Vidya Drolia) has been instrumental in settling many controversies that have existed in Indian arbitral jurisprudence since the commencement of the Arbitration and Conciliation Act, 1996 (the Act). The judgment of the Supreme Court has addressed multiple issues concerning the interpretation of the various facets of the arbitration agreement that have time and time again been obscured by obsolete and conflicting jurisprudence. The Court found it appropriate to recalibrate the Indian position of arbitrability and therefore has holistically articulated the fourfold test to determine subject-matter arbitrability supplementing the rights test laid down in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd.[2](Booz Allen). The Court has also held the ratio in Booz Allen as per incuriam with regard to the arbitrability of the tenancy disputes governed by the Transfer of Property Act, 1882. The judgment has also laid emphasis on the scope of judicial interference when the courts are seized of an application made under Sections 8 and 11 of the Act. The Court while delivering its opinion in this regard has conclusively outlined the scope of judicial inquiry that is to be conducted to determine the existence and validity of the arbitration agreement. The Court in its reasoning has extensively relied on the 246th Report of the Law Commission of India and has noted the importance of giving effect to the intention of the legislature that is evident from the series of amendments made to the Act in recent years. The opinion of the Supreme Court pertaining to the scope of judicial inquiry at the time of deciding an application under Sections 8 and 11 and the appealability of the orders under the provisions of the Act is within the purview of the present article.

 

The Prima Facie Test

 

The Supreme Court laid extensive reliance on its earlier decisions while simultaneously noting the lack of their precedential value in the light of the legislative amendments made to the Act in recent years. The Court has propounded a prima facie test in order to determine the existence of an arbitration agreement by holding that the courts must refer parties to arbitration unless they find that prima facie no valid arbitration agreement exists. The Court has reiterated that this prima facie examination is only to weed out ex facie non-existent arbitration agreements, invalid arbitration agreements and that on rare occasions the courts could consider non-arbitrability contentions. It must also be kept in the mind that the Court’s findings must be based on and limited to a summary presentation of documents rather an extensive appreciation of evidence.

 

The Court has also reiterated the importance of strictly adhering to the words in the erstwhile Section 11(6-A) of the Act and has also stated that its omission in 2019 has not changed the restrictive examination of the courts at the referral stage. Augmenting its ratio, the Court also placed reliance by elucidating the rationales of the sacrosanct doctrines of separability and kompetenz-kompetenz that give primacy to the Arbitral Tribunal to determine all questions pertaining to the validity and existence of the arbitration agreement. The Court also departed from its earlier position and has held that arbitrability is for the arbitrator to decide in accordance with the power enshrined in Section 16 of the Act. The Court has held while the principle of kompetenz-kompetenz gives the Arbitral Tribunal primacy to decide issues of non-arbitrability, they still have the final word as the courts can take a second look when deciding an application for setting aside under Section 34 of the Act. Finally, the Court in Vidya Drolia[3] has held that the scope of judicial inquiry at the time of deciding applications under Sections 8 and 11 is identical and the said sections are complementary in nature.

 

It is interesting to note, that although the Supreme Court has confined its inquiry to ascertain prima facie whether a valid arbitration agreement exists to compel parties to arbitrate, it has distinguished validity and existence as two separate corollaries to assess the enforceability of an agreement in law. It is true that many jurisdictions recognise the dichotomy between the formal and substantive validity of the arbitration agreements, it is in my opinion that the assessment of the substantive validity in terms of the requirements under the Contract Act, 1872 would not be feasible on a summary perusal of documents and would in fact require an extensive appreciation of evidentiary proceedings. The Court has pre-empted such a situation and has therefore held that when the Court cannot come to a conclusion on the validity of the arbitration agreement applying the prima facie test, it must stop any further inquiry and must refer the parties to arbitration. The judgment of the Court in Vidya Drolia[4] has summed up this approach as “when in doubt, do refer”.

 

It is also pertinent to note that this opinion of the Court in Vidya Drolia[5] is based on the findings of the another decision of the Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd.[6] (Garware). However, a coordinate Bench of the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[7] has expressed dissent with the opinion of the Court in Garware[8] that was affirmed in Vidya Drolia[9] and has accordingly referred the question to a Constitution Bench. Therefore, until this question is settled by the Constitution Bench the opinion of the Court regarding the dichotomy of existence and validity of the arbitration agreement in Vidya Drolia[10] is of uncertain precedential value.

 

Appealability and Conclusion

 

After analysing the above proposition, it is clear that the Supreme Court in Vidya Drolia[11] has vehemently laid down that the scope of judicial inquiry under Sections 8 and 11 of the Act is identical and extremely restrictive. Although the Court has brought the ambit of inquiry under Sections 8 and 11 at par by reading the prima facie test into both provisions, it has erred by failing to take cognizance of an inconsistency between the said sections with regard to the appealability of orders passed under these sections. From a conjoint reading of Section 8(1) with Section 37(1)(a) and Sections 11(6) and (6-A) with Section 11(7) of the Act it appears that an anomaly has arisen. It will be seen that an order passed under Section 8 that refuses to refer parties to arbitration is appealable under Section 37(1)(a), whereas a similar order passed under Section 11(6) read with Section 11(6-A) whether referring the parties or refusing to refer parties to arbitration is barred from an appeal by virtue of the strict rule in Section 11(7).

 

It is needless to say that this outcome is undesirable and is contrary to the true spirit of the ratio laid down by the Court in Vidya Drolia[12]. The legislature has followed the recommendations of the Law Commission of India and has carried out amendments to the Act but has not brought about the desired consistency between Sections 11(7) and37 of the Act. It is my opinion that such a lacuna could be used by recalcitrant parties, as they are likely to resort to dilatory tactics by filing mala fide Section 11 applications. Through this medium, these parties would attack the existence and validity of the arbitration agreement and would therefore pray for an order refusing to refer the parties to arbitration. By virtue of Section 11(7) of the Act that order would not be appealable. Such an outcome defeats the legislature’s policy to promote arbitration as the preferred method for dispute resolution arising from commercial contracts and is evidently not in conformity with the due process of law.

 

However, the Supreme Court in a recent judgment in Pravin Electricals (P) Ltd. v. Galaxy Infra and Engg. (P) Ltd.[13] (Pravin Electricals) has noted this inconsistency and has expressed its concern in relation to what has been laid down in Vidya Drolia[14]. The Court in Pravin Electricals[15] has invited the attention of the legislature to this conundrum by making an observation stating that Parliament might need to have relook at Sections 11(7) and 37 in order to bring the orders passed under Sections 8 and 11 at par on appealability. Therefore, until the legislature steps in and fixes this loophole the uncertainty will prevail.

 


† Hiroo Advani, Senior Managing Partner at Advani & Co.

†† Manav Nagpal, Associate at Advani & Co.

 

[1] (2021) 2 SCC 1.

[2] (2011) 5 SCC 532.

[3] (2021) 2 SCC 1.

[4] Ibid.

[5] Ibid.

[6] (2019) 9 SCC 209.

[7] 2021 SCC OnLine SC 13.

[8] (2019) 9 SCC 209.

[9] (2021) 2 SCC 1.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] 2021 SCC OnLine SC 190.

[14] (2021) 2 SCC 1.

[15] 2021 SCC OnLine SC 190.

Case BriefsSupreme Court

Supreme Court: In an important ruling on Arbitration, the 3-judge bench of RF Nariman, BR Gavai and Hrishikesh Roy, JJ has held that a Section 11 court under the Arbitration and Conciliation Act, 1996 cannot decide the questions of fact and law relating to novation of a contract containing arbitration clause and must refer them to an arbitral tribunal.

The Court held that such “complex” questions cannot possibly be decided in exercise of a limited prima facie review as to whether an arbitration agreement exists between the parties.

What’s the controversy?

A private company was incorporated on 09.12.1971 under the name and style of Asian Films Laboratories Private Limited (now ANI Media Private Limited) by Prem Prakash, the entire amount of the paid-up capital being paid for by him from his personal funds. He then distributed shares to his family members without receiving any consideration for the same.

Reuters Television Mauritius Limited (now Thomson Reuters Corporation), approached Sanjiv Prakash, son of Prem Prakash, for a longterm equity investment and collaboration with the company on the condition that he would play an active role in the management of the company. Hence, a MoU was entered into sometime in 1996 between the four members of the Prakash Family. A Shareholders’ Agreement dated 12.04.1996 [SHA] was then executed between the Prakash Family and Reuters.

The reason for entering into the SHA was as follows:

“WHEREAS

(A) Pursuant to a share purchase agreement dated today between the Prakash Family Shareholders and Reuters (the Share Purchase Agreement), Reuters has agreed to purchase 4,900 Shares (as defined below) representing 49% of the issued share capital of Asian Films Laboratories (Pvt.) Ltd. (the Company). Following completion of the Share Purchase Agreement, each of the Prakash Family Shareholders will hold the numbers of Shares set opposite his or her name in schedule 3 hereto, with the aggregate number of Shares so held by the Prakash Family Shareholders representing 51% of the issued share capital of the Company.

(B) The Shareholders (as defined below) are entering into the Agreement to set out the terms governing their relationship as shareholders in the Company.”

Disputes between the parties arose when Prem Prakash decided to transfer his shareholding to be held jointly between Sanjiv Prakash and himself, and Daya Prakash did likewise to transfer her shareholding to be held jointly between Seema Kukreja and herself. A notice invoking the arbitration clause contained in the MoU was then served by Sanjiv Prakash on 23.11.2019 upon the three Respondents, alleging that his pre-emptive right to purchase Daya Prakash’s shares, as was set out in clause 8 of the MoU, had been breached, as a result of which disputes had arisen between the parties and Justice Deepak Verma (retired Judge of this Court), was nominated to be the sole arbitrator.

However, the reply filed by Seema Kukreja and Daya Prakash, dated 20.12.2019, pointed out that the MoU ceased to exist on and from the date of the SHA, i.e. 12.04.1996, which superseded the aforesaid MoU and novated the same in view of clause 28.2 thereof. Therefore, they denied that there was any arbitration clause between the parties as the MoU itself had been superseded and did not exist after 12.04.1996.

Delhi High Court’s Verdict

After Sanjiv Prakash moved the Delhi High Court under Section 11 of the 1996 Act, the High Court, had, in it’s judgment held that,

“… the law relating to the effect of novation of contract containing an arbitration agreement/clause is well-settled. An arbitration agreement being a creation of an agreement may be destroyed by agreement. That is to say, if the contract is superseded by another, the arbitration clause, being a component/part of the earlier contract, falls with it or if the original contract in entirety is put to an end, the arbitration clause, which is a part of it, also perishes along with it.”

Supreme Court’s Verdict

The Court extensively discussed the law laid down in the recent judgment in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 wherein it was held that Section 11 Court is not empowered to determine whether an arbitration agreement is in existence or not. In the said judgment it was held that for Section 11 court to decide any matter, the “existence of an arbitration agreement” is mandatory. Whether or not an arbitration agreement exists, is a question to be decided by the Arbitral Tribunal.

“Existence of an arbitration agreement presupposes a valid agreement which would be enforced by the court by relegating the parties to arbitration. Legalistic and plain meaning interpretation would be contrary to the contextual background including the definition clause and would result in unpalatable consequences. A reasonable and just interpretation of “existence” requires understanding the context, the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law.

Section 11 does not prescribe any standard of judicial review by the court for determining whether an arbitration agreement is in existence. Section 8 states that the judicial review at the stage of reference is prima facie and not final. Prima facie standard equally applies when the power of judicial review is exercised by the court under Section 11 of the Arbitration Act. Therefore, we can read the mandate of valid arbitration agreement in Section 8 into mandate of Section 11, that is, “existence of an arbitration agreement”.”

Hence, the court by default would refer the matter when contentions relating to nonarbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings.

“This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the Arbitral Tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism.”

Applying the aforesaid test, the Court said that it was obvious that

“whether the MoU has been novated by the SHA dated 12.04.1996 requires a detailed consideration of the clauses of the two Agreements, together with the surrounding circumstances in which these Agreements were entered into, and a full consideration of the law on the subject. None of this can be done given the limited jurisdiction of a court under Section 11 of the 1996 Act.”

The Court said that the detailed arguments on whether an agreement which contains an arbitration clause has or has not been novated cannot possibly be decided in exercise of a limited prima facie review as to whether an arbitration agreement exists between the parties.

Also, this case does not fall within the category of cases which ousts arbitration altogether, such as matters which are in rem proceedings or cases which, without doubt, concern minors, lunatics or other persons incompetent to contract.

“A Section 11 court would refer the matter when contentions relating to non-arbitrability are plainly arguable, or when facts are contested. The court cannot, at this stage, enter into a mini trial or elaborate review of the facts and law which would usurp the jurisdiction of the arbitral tribunal.”

[Sanjiv Prakash v. Seema Kukreja, 2021 SCC OnLine SC 282, decided on 06.04.2021]


*Judgment by Justice RF Nariman 

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For Appellant: Senior Advocate K.V. Viswanathan

For Respondents: Senior Advocate Mukul Rohatgi and Advocates Avishkar Singhvi and Manik Dogra

Also read the detailed report on the Vidya Drolia judgment 

‘Landlord-tenant disputes under Transfer of Property Act are arbitrable’. SC lays down test for determining non-arbitrability of disputes

Case BriefsSupreme Court

Supreme Court: In the light of the “prima facie” test laid down last year in Vidya Drolia v. Durga Trading Corporation(2021) 2 SCC 1, the 3-judge bench of RF Nariman*, BR Gavai and Hrishikesh Roy, JJ has held that the Parliament may need to have a re-look at Section 11(7) and Section 37 of the he Arbitration and Conciliation Act, 1996 so that orders made under Sections 8 and 11 are brought on par qua appealability as well.

What do the relevant provisions in question read?

  1. Power to refer parties to arbitration where there is an arbitration agreement. —

(1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.

(…)

  1. Appointment of arbitrators. —

(…)

(6) Where, under an appointment procedure agreed upon by the parties, — (a) a party fails to act as required under that procedure; or (b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or (c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment. (6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or subsection (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.

(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to 3 the Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court is final and no appeal including Letters Patent Appeal shall lie against such decision.

Legislative History

Sections 8 and 11 were amended pursuant to a detailed Law Commission Report being the 246th Law Commission Report on Arbitration. Shedding light on the legislative history of the provisions in question, the Court said that  when Parliament enacted the 2015 amendment pursuant to the Law Commission Report, it followed the Scheme of the Law Commission’s Report qua Section 8 and Section 37 by enacting the words “….. unless it finds that prima facie no valid arbitration agreement exists……” in Section 8(1) and the insertion of sub-clause (a) in Section 37(1) providing an appeal in an order made under Section 8, which refuses to refer 44 parties to arbitration. However, so far as Section 11(6) and Section 11(6A) are concerned, what was recommended by the Law Commission was not incorporated.

“Section 11(6A) merely confined examination of the Court to the existence of an arbitration agreement. Section 11(7) was retained, by which no appeal could be filed under an order made under Section 11(6) read with Section 11(6A), whether the Court’s determination led to a finding that the arbitration agreement existed or did not exist on the facts of a given case. Concomitantly, no amendment was made to Section 37(1), as recommended by the Law Commission.”

What was held in Vidya Drolia Judgment?

‘Landlord-tenant disputes under Transfer of Property Act are arbitrable’. SC lays down test for determining non-arbitrability of disputes

Explaining the scope of the phrase “existence of an arbitration agreement” in Vidya Drolia judgment, the 3-judge bench of NV Ramana*Sanjiv Khanna** and Krishna Murari, JJ  had held that the phrase ‘existence of an arbitration agreement’ in Section 11 of the of the Arbitration and Conciliation Act, 1996, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the arbitral tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.

“An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law.”

On the question as to who decides arbitrability, the Court held that the scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted. Further, the general rule and principle, in view of the legislative mandate clear from the amendments to the of the Arbitration and Conciliation Act, 1996 by Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of nonarbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.

Conclusion

Since, by a process of judicial interpretation, Vidya Drolia has now read the “prima facie test” into Section 11(6A) so as to bring the provisions of Sections 8(1) and 11(6) r/w 11(6A) on par and considering that Section 11(7) and Section 37 have not been amended, an anomaly thus arises.

“Whereas in cases decided under Section 8, a refusal to refer parties to arbitration is appealable under Section 37(1)(a), a similar refusal to refer parties to arbitration under Section 11(6) read with Sections 6(A) and 7 is not appealable.”

Hence, it was held that the Parliament may need to have a re-look at Section 11(7) and Section 37 so that orders made under Sections 8 and 11 are brought on par qua appealability as well.

[Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engineering Pvt. Ltd, 2021 SCC OnLine SC 190, decided on 08.03.2021]


*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For appellant: Senior Advocate Shyam Divan

For Respondent: Senior Advocate Dhruv Mehta