Court Can Delve Into Whether Dispute Falls Within "Excepted Clause" While Deciding Section 11 Application: Supreme Court

The Supreme Court, on July 20, held that when a Court is approached under Section 11 of the Arbitration and Conciliation Act 1996, for the appointment of an arbitrator, it can delve into whether the subject matter of dispute would fall under “excepted clauses”.

A bench comprising of Justices MR Shah and BV Nagarathna, affirmed that in case the facts of the dispute are glaring, it can very well decide on the non-arbitrability and jurisdiction of the subject matter including whether the dispute falls within the excepted clauses.

Section 11 of the Arbitration and Conciliation Act prescribes the procedure for appointment of arbitrators. In case the parties to a dispute are unable to take a call on the arbitrator, either of the parties can approach the Court with an application. The ambit of the Court dealing with a Section 11 application is limited. While dealing with such applications, Court must only look at whether there exists an arbitration agreement. However, a stream of judicial opinions has changed this notion and jurisprudence has developed over it.

In Duro Felguera, S.A. v. Gangavaram Port Limited (2017) 9 SCC 729, the Supreme Court held that the Court can only be concerned about the arbitration agreement and an arbitration clause for a reference under Section 11. Going beyond this seminal question would be impermissible.

A recent three judges bench judgment of the Supreme Court in Vidya Drolia and Others v. Durga Trading Corporation (2021) 2 SCC 1, the Court affirmed that at the stage of referral, courts are not supposed to perform "ministerial functions". It further held that though the Courts are not supposed to go beyond the question of existence of arbitration agreement, it can cut the "deadwood" of ex-facie non-arbitrable disputes and invalid arbitration agreements. The bench observed that courts need to “find the right amount and the context when it would examine the prima-facie case or exercise restraint.”

In its judgment on Wednesday, the Court while dealing with the question of whether the issue of excepted disputes can be examined at the stage of Section 11, observed that, “We are of the opinion that though the Arbitral Tribunal may have jurisdiction and authority to decide the disputes including the question of jurisdiction and non­-arbitrability, the same can also be considered by the Court at the stage of deciding Section 11 application if the facts are very clear and glaring and in view of the specific clauses in the agreement binding between the parties, whether the dispute is non­-arbitrable and/or it falls within the excepted clause.”

It was the case of the petitioner that, there being ‘accord and satisfaction’ for the claim, being an ‘excepted claim’, it was not open for the respondent to invoke the arbitration agreement and request for appointment of an Arbitrator. It was further submitted that in view of the specific decision by the General Manager, on “Notified Claims”, for the same claims which are not held to be ‘Notified Claims’ by the General Manager, the matter cannot be referred to the Arbitrator in view of the clause pertaining to excluded matters.

The Court held that the High Court had erred in referring the dispute to arbitration and appointing a sole Arbitrator to adjudicate on the dispute with respect to the claims which as such are held to be not Notified Claims.