Summary
The Supreme Court held that a High Court hearing an application under Section 11 of the Arbitration and Conciliation Act, 1996 must confine itself to the prima facie existence of the arbitration agreement, and erred in examining an audit report in detail and refusing reference on the ground that the claim was dishonest and the dispute non-existent. Frivolity is for the arbitral tribunal, which may impose costs on a party abusing the process. A sole arbitrator was appointed.
Issues
- Whether the High Court erred in dismissing the appellant's application under Section 11 of the Arbitration and Conciliation Act, 1996 on the ground that the dispute was non-existent and the claim manifestly dishonest.
- What is the scope of inquiry of a referral court under Section 11 after the 2015 amendment, and whether it extends to weeding out frivolous or dishonest claims.
Provisions considered
- Section 11 (including sub-section (6) and sub-section (6A)), Arbitration and Conciliation Act, 1996Relying on SBI General Insurance Co. Ltd. v. Krish Spinning and the Constitution Bench in In Re: Interplay, the Court read the Section 11 inquiry, as narrowed by the 2015 amendment, as limited to the prima facie existence of an arbitration agreement; the High Court's detailed assessment of the auditor's report exceeded that scope. (¶¶ 16, 17, 18, 19)
Held
- The inquiry of a referral court under Section 11 is limited to ascertaining the prima facie existence of an arbitration agreement; a detailed examination of the facts and of evidence such as an auditor's report goes beyond that scope and defeats the legislative intent behind the 2015 amendment. (¶¶ 17, 18)
- Whether a claim is frivolous or dishonest should not be decided by the referral court at the Section 11 stage, because the arbitrator is equally, if not more, competent to decide it on the full pleadings and evidence. (¶ 19)
- To balance the limited referral jurisdiction against misuse by parties pressing non-existent or mala fide claims, the arbitral tribunal may direct that the costs of arbitration be borne by the party it ultimately finds to have abused the process and harassed the other side. (¶ 20)
- Since the existence of the arbitration clause in the Master Services Agreement was undisputed, whether a valid dispute exists for arbitration can be taken up by the arbitral tribunal as a preliminary issue. (¶ 21)
Result
Appeal allowed; High Court's order set aside; Mr. S.J. Vazifdar, former Chief Justice of the Punjab and Haryana High Court, appointed sole arbitrator; all contentions and objections of the respondent kept open before the arbitrator; the observations are not a determination of the merits.