Referral of Parties to Arbitration: Key Insights from the 2015 Amendments

Introduction

The Arbitration and Conciliation Act, 1996 was enacted to facilitate the swift and effective resolution of disputes through alternative dispute resolution mechanisms, primarily arbitration and conciliation. This legislative framework aimed to alleviate the burden on the judiciary and promote a more efficient dispute resolution process. However, as time progressed, the Act faced various criticisms and shortcomings that highlighted the need for reform.

In response to these concerns, significant amendments were made to the Act in 2015, particularly in Section 8, which governs the referral of parties to arbitration. The 2015 amendment introduced a clearer procedural framework and a more robust pro-arbitration stance, aiming to streamline the arbitration process and reduce judicial interference. This change marked a pivotal shift in how courts engage with arbitration agreements, underscoring the imperative to refer disputes to arbitration when a valid agreement exists.

Recent judicial interpretations, particularly by the Calcutta High Court, have further clarified the impact of these amendments. The court has concluded that the principles established in the earlier case of Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya, which restricted the bifurcation of causes of action in arbitration, are no longer applicable post-amendment. Instead, the focus now rests on the validity of arbitration agreements, reinforcing the legislative intent to favor arbitration as a means of dispute resolution. This evolving landscape emphasizes the importance of understanding the interplay between statutory provisions and judicial interpretations in the context of arbitration in India.

Amendment of 2015 in the Arbitration and Conciliation Act, 1996

Prior to the amendment of 2015, the provision in Section 8 stated that “A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.”

Accordingly, the Arbitration and Conciliation (Amendment) Act, 2015 came into force on 23 October 2015. After the amendment, a definite time limit was set within which the parties are required to apply under Section 8 of the Arbitration and Conciliation Act, as pointed out in the case of Parasramka Holdings (P) Ltd. vs. Ambience (P) Ltd. & Anr. (2018).

Post Amendment: Section 8

Section 8. 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. (Substituted by Act No. 3 of 2016 dated 31.12.2015).
2. The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof. (Inserted by Act No. 3 of 2016 dated 31.12.2015).
3. Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.

Essential Ingredients of Section 8

1. A judicial authority must refer parties to arbitration if an action is brought before it concerning a matter that is subject to an arbitration agreement.
2. The referral is contingent upon an application being made by a party to the arbitration agreement, or someone claiming through them, before the submission of their first statement on the substance of the dispute.
3. The judicial authority will refer the parties to arbitration unless it finds, at a prima facie level, that no valid arbitration agreement exists.
4. The application to refer to arbitration must be accompanied by the original arbitration agreement or a duly certified copy.
5. If the original agreement or certified copy is not available with the applying party and is retained by the other party, the application must include a copy of the arbitration agreement along with a petition requesting the court to order the other party to produce the original or certified copy.
6. Even if an application is pending before the judicial authority, arbitration may still commence or continue, and an arbitral award may be made.

Mandatory Nature of Section 8

The Supreme Court in the case of P. Anand Gajapathi Raju & Ors. v. P. V. G. Raju (Dead) & Ors. [2000 (4) SCC 539] has held that the language of Section 8 is peremptory in nature. Therefore, in cases where there is an arbitration clause in the agreement, it is obligatory for the court to refer the parties to arbitration in terms of their arbitration agreement, and nothing remains to be decided in the original action after such an application is made except to refer the dispute to an arbitrator.

The conditions that must be satisfied under sub-sections (1) and (2) of Section 8 before the court can exercise its powers are:

1. There is an arbitration agreement.
2. A party to the agreement brings an action in the court against the other party.
3. The subject matter of the action is the same as the subject matter of the arbitration agreement.
4. The other party moves the court for referring the parties to arbitration before submitting their first statement on the substance of the dispute.

This last provision creates a right in the person bringing the action to have the dispute adjudicated by the court once the other party has submitted their first statement of defense. However, if the party wanting arbitration applies to the court after submitting their statement and the opposing party does not object, the court can still refer the parties to arbitration.

The phrase “which is the subject of an arbitration agreement” does not necessarily require that the agreement must already exist before the action is brought in court; it may also refer to an agreement formed while the action is pending.

Causes of Action Cannot Be Bifurcated in Arbitration

In the case of Sukanya Holdings Pvt. Ltd v. Jayesh H. Pandya & Anr (2003), it was established that all parties were not signatories to the agreement containing the arbitration clause, and the Supreme Court held that causes of action cannot be bifurcated in arbitration. Thus, arbitral proceedings could be restricted only to the parties to the arbitration agreement.

The court concluded:

“The relevant language used in Section 8 is–‘in a matter which is the subject matter of an arbitration agreement’. The court is required to refer the parties to arbitration. Therefore, the suit should be in respect of ‘a matter’ which the parties have agreed to refer and which comes within the ambit of the arbitration agreement. Where, however, a suit is commenced as to a matter which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8. The word ‘a matter’ indicates that the entire subject matter of the suit should be subject to the arbitration agreement.”

Bifurcation of the suit into two parts—one to be decided by the arbitral tribunal and the other by the civil court—would inevitably delay proceedings, undermining the Act’s purpose of ensuring speedy dispute resolution.

Sukanya Holdings is No Longer Relevant Post-Amendment

In the case of Lindsay International Private Limited v. Laxmi Niwas Mittal (2021), the court discussed the legislative intent of the 2015 Amendment in Section 8. It noted that the amended Section 8 instructs courts to refer parties to arbitration regardless of any judgment, decree, or order of the Supreme Court unless there is clear evidence that no valid arbitration agreement exists. It is up to the party opposing arbitration to prove that the agreement is invalid.

Citing the case of Vidya Drolia, the court noted that post-amendment, courts should interfere less at the reference stage and should generally follow a “pro-arbitration approach.” The succinct advice on the prima facie evaluation of the validity of the arbitration agreement is: “when in doubt, do refer.”

Therefore, the court concluded:

“The conclusion, without a doubt, is that Sukanya Holdings is no longer a relevant factor for the court to consider at the stage of reference in an application under section 8 of the Act. The court is not even under a mandate, post-amendment, to adjudicate on the bifurcability of the causes of action or the presence of parties who are necessary parties to the action but not to the arbitration. The only brake in the momentum of reference is the court finding, prima facie, that no valid arbitration agreement exists.”

Thus, if a valid arbitration agreement exists, the court must refer the parties to arbitration even if there are judgments, decrees, or orders of the Supreme Court or any other court pronounced before 2016.

The court concluded that the principles from Sukanya Holdings regarding bifurcation of causes of action remain relevant for cases filed before the 2016 amendment but should not apply to those filed after October 23, 2015, when the changes took effect. The focus should be solely on whether a valid arbitration agreement exists.

Conclusion

In conclusion, the amendments to the Arbitration and Conciliation Act, 1996, particularly the changes introduced in 2015, have significantly reshaped the landscape of arbitration in India. The clarifications in Section 8 emphasize the judicial obligation to refer disputes to arbitration when a valid agreement exists, thereby reinforcing the pro-arbitration stance of the legislature. The shift away from the principles established in Sukanya Holdings underscores a critical evolution, allowing for a more streamlined and efficient dispute resolution process.

As courts continue to interpret these amendments, the emphasis on minimizing judicial interference and promoting arbitration as the preferred method for resolving disputes will undoubtedly contribute to a more robust legal framework. This transformation not only enhances the efficiency of dispute resolution but also aligns with global best practices, making India a more attractive destination for arbitration.

Ultimately, understanding these changes is essential for legal practitioners, businesses, and parties involved in arbitration agreements. As the landscape continues to evolve, staying informed about these developments will be crucial for navigating the complexities of arbitration in India.