V.B. Cold Storage Private Limited vs Bajaj Allianz General Insurance ...
2021 Latest Caselaw 3751 AP

     IN THE HIGH COURT OF ANDHRA PRADESH: AMARAVATI

 HON'BLE Mr. JUSTICE ARUP KUMAR GOSWAMI, CHIEF JUSTICE

           ARBITRATION APPLICATION No.165 of 2014

                      (Through Video-Conferencing)

V.B. Cold Storage Private Limited, rep. By Director
Badam Krishna Murthy, S/o. Late Pentayya, aged
48 years, Rajulathallavalasa village, Bhimili (M),
Visakhapatnam District, Andhra Pradesh                            ... Applicant

                                  Versus

Bajaj Allianz General Insurance Company Limited, rep.
by its Manager, 3rd floor, P.G. Plaza, V.I.P. Road,
Visakhapatnam (A.P.)                                           ... Respondent


Counsel for the applicant         :        Mr. S.V.S.S. Siva Ram

Counsel for the respondent        :        Mr. P. Rajasekhar


Date of hearing                   :        16.07.2021

Date of judgment                  :        24.09.2021


                             JUDGMENT

This application is filed under Section 11(4) and (6) of the

Arbitration and Conciliation Act, 1996 (for short, "the Act of 1996") for

appointment of an arbitrator.

2. The applicant is in the business of running a cold-storage for

perishable consumables belonging to farmers/vendors. It had taken a

Standard Fire & Special Perils Policy from the respondent-company for the

year 2010-11. For the year 2011-12, the applicant had taken two

Standard Fire & Special Perils Policies bearing Nos.OG-12-1819-4005-

00000009 for Rs.2,00,00,000/- (Rupees Two Crores) and OG-12-1819-

4005-00000010 for Rs.3,00,00,000/- (Rupees Three Crores) from the 2 HCJ A.A.No.165 of 2014

respondent-company on 28.05.2011. It was regularly paying the premium

and submitting monthly stock declaration statements.

3. On 21.12.2011, a major fire accident had taken place in the

cold-storage unit due to short circuit resulting in the entire premises of the

cold-storage unit being gutted. All the commodities stored in the cold

storage also went up in flames. On that day itself, the applicant informed

the respondent about the incident. Discussions had ensued in between

the representatives of the applicant and the respondent with regard to

calculation of the claim and the applicant was informed that the

calculation of loss would be on the basis of average of everyday stock

values of each month, which was not acceptable to the applicant as the

applicant has been submitting declaration statements basing on the

quantum of stock stored on the last date of each month.

4. It is pleaded that the applicant had suffered losses to the tune of

Rs.1,51,34,922/-. On 07.03,2012, the applicant addressed a letter to the

surveyors of the respondent, amongst others, requesting to complete the

survey report at the earliest and also requesting to recommend to the

respondent to release an interim amount of Rs.60,00,000/- to disburse the

same to some farmers who were under great financial loss.

5. A letter dated 05.05.2012 was issued by the applicant to the

respondent to pay the claim amount of Rs.1,51,34,922/- and another

letter dated 25.05.2012 was issued requesting to finalize the report on the

basis of the declaration submitted by the applicant. A letter dated

23.07.2012 was issued by the respondent that the stock declaration

statements submitted by the applicant did not conform to the procedure

laid down in the fire declaration policy and requested the applicant to 3 HCJ A.A.No.165 of 2014

submit fresh declarations on either the average of the values at risk on

each day of the month or the highest value at risk during the month,

much to the consternation of the applicant, as the respondent had never

made a whisper that the stock declaration statements submitted by the

applicant were not conforming to the fire declaration policy for the

previous three years.

6. Subsequently, on 08.08.2012, the respondent sent a letter to the

applicant enclosing a copy of the surveyor's letter along with the mode of

assessment and requesting the applicant to give its consent to enable the

respondent to process the claim. It is the pleaded case of the applicant

that because of the turn of events, he was in a very depressed state of

mind and as vendors/farmers were constantly pressing the applicant to

settle the claims and had threatened the applicant with dire consequences

if the claims were not settled, the applicant had no option but to accept

the survey report, which settled the claim of the applicant for

Rs.62,88,241/-. Accordingly, he was compelled to sign the Indemnity

Bond, which was a pre-requisite condition for release of the aforesaid

amount. On 12.12.2012, the applicant addressed a letter to the

respondent informing that he was compelled to accept the insurance claim

under duress and that the applicant would treat the issue of settlement as

a dispute and that the applicant would initiate arbitration proceedings as

per clause 10 of the General Conditions of the Commercial Package Policy

and the said letter was received by the respondent on 17.12.2012. On a

request being made, one Sri Vijairagavan agreed to be an arbitrator and

he entered on arbitration proceedings on 06.04.2013 and communicated

the same to the applicant and the respondent. The arbitrator issued

proceedings dated 18.04.2013 and requested the respondent to appoint 4 HCJ A.A.No.165 of 2014

an arbitrator within the time schedule prescribed in the policies to enable

both the arbitrators to appoint a third arbitrator forming a tribunal and

proceed for resolution of the dispute. The respondent, however, did not

appoint a second arbitrator and such fact was also communicated by the

arbitrator to the applicant. Since the respondent had not taken any

action, recourse is taken by the applicant seeking appointment of an

arbitrator on behalf of the respondent.

7. A counter-affidavit was filed by the respondent. While admitting

that the entire premises of the cold-storage unit was gutted along with all

the commodities stored in the cold-storage unit belonging to various

farmers/vendors, it is stated that the applicant having received an amount

of Rs.62,88,241/- as full and final settlement of his claim by voluntarily

executing Indemnity Bond, Discharge Bond and also consent letter

without raising any protest and demur, cannot seek appointment of an

arbitrator. It is stated that the declaration submitted by the applicant was

not in conformity with the procedure prescribed in the policy and the

I.R.D.A. surveyors assessed the loss by two methods - by one method,

assessment was quantified at Rs.63,00,216/- and by the other method, at

Rs.48,44,496/- and the applicant had accepted the second method of

assessment. The plea set up by the applicant that the claim was accepted

under duress was denied and it is pleaded that the execution of Indemnity

Bond, Discharge Bond and consent letter were voluntarily accepted by the

applicant and, therefore, the arbitration application is liable to be

dismissed as there was no existing dispute.

8. A reply-affidavit was filed by the applicant reiterating the plea of

execution of documents under duress. It is stated that within a week

from the receipt of an amount of Rs.62,88,241/-, the applicant addressed 5 HCJ A.A.No.165 of 2014

a letter to the respondent requesting it to pay the balance claimed

amount and, therefore, the present application for appointment of an

arbitrator is maintainable.

9. Mr. S.V.S.S. Siva Ram, learned counsel for the applicant, submits

that acceptance of the amount under duress to tide over difficulties faced,

cannot stand in the way of appointment of an arbitrator on the

respondent's side, as the respondent had not paid the balance amount of

Rs.93,50,466/-. He placed reliance on a three-Judge Bench judgment of

the Hon'ble Supreme Court in Mayavati Trading Private Limited v.

Pradyuat Deb Burman, reported in (2019) 8 SCC 714, a judgment of

the Hon'ble Supreme Court in Oriental Insurance Co. Ltd. V. Dicitex

Furnishing Ltd., reported in (2020) 2 SCC 464 and a judgment dated

13.02.2019 rendered by a learned single Judge of the High Court for the

State of Telangana in M/s. Sitaram Spinners Pvt. Ltd., Hyderabad v.

New India Assurance Co. Ltd., Secunderabad (Arbitration

Application No.22 of 2017), wherein the learned single Judge had

observed that in view of Section 11(6-A) of the Act of 1996, the High

Court while considering the application under Section 11(5) & (6) of the

Act of 1996 shall confine itself to examination of the existence of an

arbitration agreement and no more.

10. Abiding by the stand taken in the counter-affidavit,

Mr. P. Rajasekhar, learned counsel for the respondent, submits that the

Indemnity Bond, Discharge Bond and consent letter were voluntarily

executed by the applicant and after four months of such execution, a false

plea is raised that such execution of documents was made under duress

and in compelling circumstances. It is contended that as the applicant

had acknowledged the amount of Rs.62,88,241/- as full and final 6 HCJ A.A.No.165 of 2014

settlement of all the claims of the applicant, there is no dispute regarding

any claim remaining outstanding and, therefore, the application is

mis-conceived.

11. I have considered the submission of the learned counsel for the

parties and have perused the materials on record.

12. At the outset, it will be relevant to take note of Clause 10 relating

to dispute resolution as engrafted in the Commercial Package Policy.

Clause 10 reads as under:

"10. Dispute Resolution

a) If any dispute or difference shall arise as to the quantum

to be paid under this Policy (liability being otherwise

admitted), such difference shall independently of all other

question be referred to the decision of a sole arbitrator to

be appointed in writing by the parties to or if they cannot

agree upon a single arbitrator within 30 days of any party

invoking arbitration, the same shall be referred to a panel

of three arbitrators, comprising of two arbitrators one to

be appointed by each of the parties to the

dispute/difference and the third arbitrator to be appointed

by such two arbitrators and arbitration shall be conducted

under and in accordance with the provisions of the

Arbitration and Conciliation Act, 1996. The law of the

arbitration will be Indian law, and the seat of arbitration

and venue for all hearings shall be within India.

b) It is clearly agreed and understood that no difference or

dispute shall be referable to arbitration as herein before 7 HCJ A.A.No.165 of 2014

provided if the Company has disputed or not accepted

liability under or in respect of this Policy.

c) It is hereby expressly stipulated and declared that it shall

be a condition precedent to any right of action or suit

upon this Policy that the award by such

arbitrator/arbitrators of the amount of the loss or damage

shall be first obtained.

d) It is also hereby further expressly agreed and declared

that if the Company shall disclaim liability to the insured

for any claim hereunder and such claim shall not, within

12 calendar months from the date of such disclaimer

having been made the subject matter of a suit in a court

of law, then the claim shall for all purposes be deemed to

have been abandoned and shall not thereafter be

recoverable hereunder.

e) In the event that these arbitration provisions shall be held

to be invalid then all such disputes or differences shall be

referred to the exclusive jurisdiction of the Indian Courts."

13. It is to be noted that the respondent has not denied that the

Commercial Package Policy is not applicable in between the parties and

that there is no agreement for resolving the disputes through arbitration.

Thus, the existence of an arbitration clause in the contract of insurance is

not in dispute. The question that arises for consideration is whether the

discharge of liability in the present case upon acceptance of the

compensation amount by signing the Indemnity Bond, Discharge Bond

and consent letter was voluntary or under coercion or undue influence 8 HCJ A.A.No.165 of 2014

and whether the applicant is justified in invoking Section 11(6) of the Act

of 1996.

14. In United India Insurance Company Limited v. Antique Art

Exports Private Limited, reported in (2019) 5 SCC 362, the Hon'ble

Supreme Court, while noting that execution of full and final settlement,

receipt or a discharge voucher in itself cannot be a bar to arbitration, had

relied on para 44 of the judgment in National Insurance Company

Limited v. Boghara Polyfab (P) Ltd., reported in (2009) 1 SCC 267.

In Boghara Polyfab (P) Ltd. (supra), at para 44, it was observed as

follows:

"44. None of the three cases relied on by the appellant lay

down a proposition that mere execution of a full and final

settlement receipt or a discharge voucher is a bar to

arbitration, even when the validity thereof is challenged

by the claimant on the ground of fraud, coercion or

undue influence. Nor do they lay down a proposition that

even if the discharge of contract is not genuine or legal,

the claims cannot be referred to arbitration. In all the

three cases, the Court examined the facts and satisfied

itself that there was accord and satisfaction or complete

discharge of the contract and that there was no evidence

to support the allegation of coercion/undue influence."

15. It was held that a mere plea of fraud, coercion or undue influence

in itself is not enough and the party who alleged the same is under an

obligation to prima facie establish the same by placing satisfactory 9 HCJ A.A.No.165 of 2014

material on record before the Chief Justice or his Designate to exercise

power under Section 11(6) of the Act of 1996.

16. In para 20 of the Antique Art Exports Private Limited (supra),

it was held as follows:

"20. The submission of the learned counsel for the

respondent that after insertion of sub-section (6-A) to

Section 11 of the Amendment Act, 2015 the jurisdiction

of this Court is denuded and the limited mandate of the

Court is to examine the factum of existence of an

arbitration and relied on the judgment in Duro Felguera,

SA v. Gangavaram Port Ltd. [Duro Felguera,

SA v. Gangavaram Port Ltd., (2017) 9 SCC 729 : (2017) 4

SCC (Civ) 764] The exposition in this decision is a general

observation about the effect of the amended provisions

which came to be examined under reference to six

arbitrable agreements (five agreements for works and

one corporate guarantee) and each agreement contains a

provision for arbitration and there was serious dispute

between the parties in reference to constitution of

Arbitral Tribunal whether there has to be Arbitral Tribunal

pertaining to each agreement. In the facts and

circumstances, this Court took note of sub-section

(6-A) introduced by the Amendment Act, 2015 to Section

11 of the Act and in that context observed that the

preliminary disputes are to be examined by the arbitrator

and are not for the Court to be examined within the

limited scope available for appointment of arbitrator 10 HCJ A.A.No.165 of 2014

under Section 11(6) of the Act. Suffice it to say that

appointment of an arbitrator is a judicial power and is not

a mere administrative function leaving some degree of

judicial intervention; when it comes to the question to

examine the existence of a prima facie arbitration

agreement, it is always necessary to ensure that the

dispute resolution process does not become unnecessarily

protracted.

17. In the factual matrix of the case as presented in Antique Art

Exports Private Limited (supra), the Hon'ble Supreme Court observed

that prima facie no dispute subsisted after the discharge voucher being

signed by the respondent without any demur or protest and claim being

finally settled with accord and satisfaction and after 11 weeks of the

settlement of claim a letter was sent on 27-7-2016 for the first time

raising a voice in the form of protest that the discharge voucher was

signed under undue influence and coercion with no supportive prima facie

evidence being placed on record. Accordingly, in absence thereof, it was

held that it must follow that the claim had been settled with accord and

satisfaction leaving no arbitral dispute subsisting under the agreement to

be referred to the arbitrator for adjudication.

18. Section 11 (6-A) of the Act of 1996 was inserted by Act 3 of 2016

with effect from 23.10.2015. Section 11 (6-A) reads as follows:

"11. (6-A) 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 sub-section (6), shall,

notwithstanding any judgment, decree or order of any 11 HCJ A.A.No.165 of 2014

court, confine to the examination of the existence of an

arbitration agreement."

19. Section 11(6-A) was omitted by Act 33 of 2019. However, Section

3 of the Amendment Act of 2019 insofar as it pertains to this omission has

not yet been brought into force.

20. In Duro Felguera, SA v. Gangavaram Port Ltd., reported in

(2017) 9 SCC 729, at para 48, the Hon'ble Supreme Court had observed

that the intention of the legislature is crystal clear that the court should

and need only look into one aspect, which is the existence of an

arbitration agreement. What are the factors for deciding as to whether

there is an arbitration agreement is the next question. The resolution to

that is simple, in that it needs to be seen if the agreement contains a

clause which provides for arbitration pertaining to the disputes which

have arisen between the parties to the agreement. At para 59, it was

observed that scope of the power under Section 11(6) of the Act of 1996

was considered in the decisions in SBP & Co. v. Patel Engg. Ltd.,

reported in (2005) 8 SCC 618 and Boghara Polyfab (P) Ltd. (supra)

and the said position continued till the amendment was brought about in

the year 2015. It was emphasized that after the amendment, all that the

courts need to see is whether an arbitration agreement exists - nothing

more nothing less. It was further observed that the legislative policy and

purpose is essentially to minimise the Court's intervention at the stage of

appointing the arbitrator and this intention as incorporated in Section

11(6-A) ought to be respected.

21. In Mayavati Trading Private Limited (supra), it was observed

that prior to insertion of Section 11 (6-A), the Hon'ble Supreme Court in 12 HCJ A.A.No.165 of 2014

several judgments, beginning with SBP & Co. (supra) has held that at

the stage of a Section 11(6) application being filed, the court need not

merely confine itself to the examination of the existence of an arbitration

agreement but could also go into certain preliminary questions such as

stale claims, accord and satisfaction having been reached, etc.

22. Following Duro Felguera (supra), the Hon'ble Supreme Court in

Mayavati Trading Private Limited (supra) observed that the law prior

to the 2015 Amendment that has been laid down by the court which

would have included going into whether accord and satisfaction has taken

place, has now been legislatively overruled. It was held that Section

11(6-A) is confined to the examination of the existence of an agreement

and is to be understood in the narrow sense as has been laid down in the

judgment in Duro Felguera (supra) and taking that view, the judgment

in Antique Art Exports Private Limited (supra) was overruled as

having not laid down the correct law.

23. In Oriental Insurance Company and another v. Dicitex

Furnishing Limited, reported in (2020) 4 SCC 621, the decision of the

Bombay High Court appointing an arbitrator was challenged on the

ground that Dicitex having accepted the proffered amounts and having

withdrawn the reservation and protest, it could not have argued that it

was subjected to coercion or that the appellant forced it to sign the final

discharge voucher. The Bombay High Court had, prima facie, observed

that it would be appropriate that the issue raised by the Oriental

Insurance Company that Dicitex had signed such discharge voucher

unconditionally and the issue raised by Dicitex that the same was under

duress and coercion is conclusively decided by the Arbitral Tribunal and if

necessary, by leading oral evidence.

                                    13                                      HCJ
                                                            A.A.No.165 of 2014

24. On consideration of the materials on record, the Hon'ble Supreme

Court dismissed the appeal. It was also observed at para 26 as follows:

"26. An overall reading of Dicitex's application [under

Section 11(6)] clearly shows that its grievance with

respect to the involuntary nature of the discharge

voucher was articulated. It cannot be disputed that

several letters -- spanning over two years--stating that it

was facing financial crisis on account of the delay in

settling the claim, were addressed to the appellant. This

Court is conscious of the fact that an application under

Section 11(6) is in the form of a pleading which merely

seeks an order of the court, for appointment of an

arbitrator. It cannot be conclusive of the pleas or

contentions that the claimant or the party concerned can

take in the arbitral proceedings. At this stage, therefore,

the court which is required to ensure that an arbitrable

dispute exists, has to be prima facie convinced about the

genuineness or credibility of the plea of coercion; it

cannot be too particular about the nature of the plea,

which necessarily has to be made and established in the

substantive (read : arbitration) proceeding. If the court

were to take a contrary approach and minutely examine

the plea and judge its credibility or reasonableness, there

would be a danger of its denying a forum to the applicant

altogether, because rejection of the application would

render the finding (about the finality of the discharge and

its effect as satisfaction) final, thus, precluding the 14 HCJ A.A.No.165 of 2014

applicant of its right event to approach a civil court.

There are decisions of this Court (Associated

Construction v. Pawanhans Helicopters Ltd. [Associated

Construction v. Pawanhans Helicopters Ltd., (2008) 16

SCC 128] and Boghara Polyfab [National Insurance Co.

Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 :

(2009) 1 SCC (Civ) 117] which upheld the concept of

economic duress. Having regard to the facts and

circumstances, this Court is of the opinion that the

reasoning in the impugned judgment [Dicitex Furnishing

Ltd. v. Oriental Insurance Co. Ltd., 2015 SCC OnLine Bom

5055] cannot be faulted.

25. In Dicitex Furnishing Limited (supra), the Hon'ble Supreme

Court had not considered Section 11(6-A) of the Act of 1996. The

decision rendered by the three-Judge Bench in Mayavati Trading

Private Limited (supra) was also not brought to the notice and it was

on the basis of consideration of the materials on record, the Hon'ble

Supreme Court had accepted that Dicitex was facing financial distress and

economic distress and in view of its various urgent business liabilities, it

apparently signed the said discharge voucher reluctantly and that the

Oriental Insurance Company had refused to accept such discharge

voucher signed by Dicitex with letter of protest.

26. In view of the decision rendered in Mayavati Trading Private

Limited (supra), wherein a three-Judge Bench of the Hon'ble Supreme

Court had observed that as Section 11(6-A) is confined to the examination

of the existence of an arbitration agreement and is to be understood in a

narrow sense and as the law which enabled the court to examine as to 15 HCJ A.A.No.165 of 2014

whether accord and satisfaction had taken place has been legislatively

overruled, it will not be necessary for this Court to go into the aforesaid

question as to whether the applicant had voluntarily executed Indemnity

Bond, Discharge Bond and also consent letter or whether the applicant

had signed such indemnity bond, discharge bond and also consent letter

unconditionally and the same is left open to be decided by the Arbitral

Tribunal.

27. In Vidya Drolia and others v. Durga Trading Corporation,

reported in (2019) 20 SCC 406, a reference was made to a Bench of

three Judges vide order dated 28.02.2019 as it doubted the legal ratio

expressed in Himangni Enterprises v. Kamaljeet Singh Ahluwalia,

reported in (2017) 10 SCC 706 that landlord-tenant disputes governed

by the provisions of the Transfer of Property Act, 1882 are not arbitrable

as this would be contrary to public policy. The reference was answered in

Vidya Drolia and others v. Durga Trading Corporation, reported in

(2021) 2 SCC 1, which, hereinafter shall be referred to as Vidya Drolia

2 (supra) whenever necessary. The Hon'ble Supreme Court observed that

the issues required to be answered relate to two distinct but

interconnected matters, viz:

"2.1. (i) Meaning of non-arbitrability and when the

subject-matter of the dispute is not capable of being

resolved through arbitration.

2.2. (ii) The conundrum -- "who decides" -- whether the

court at the reference stage or the Arbitral Tribunal in

the arbitration proceedings would decide the question of

non-arbitrability.

                                      16                                      HCJ
                                                              A.A.No.165 of 2014

2.3. The second aspect also relates to the scope and

ambit of jurisdiction of the court at the referral stage

when an objection of non-arbitrability is raised to an

application under Section 8 or 11 of the Arbitration and

Conciliation Act, 1996 (for short "the Arbitration Act")."

28. In Vidya Drolia 2 (supra), the Hon'ble Supreme Court

propounded a four-fold test for determining when the subject matter of

the dispute in an arbitrable agreement is not arbitrable. It was also

observed that the aforesaid principles ought to be applied with care and

caution. While overruling the ratio laid down in Himangni Enterprises

(supra), it was held that landlord-tenant disputes are arbitrable as the

Transfer of Property Act does not forbid or foreclose arbitration. It was,

however, held that landlord-tenant disputes covered and governed by

rent control legislation would not be arbitrable when specific court or

forum has been given exclusive jurisdiction to apply and decide special

rights and obligations. Such rights and obligations can only be adjudicated

and enforced by the specified court/forum, and not through arbitration.

The Hon'ble Supreme Court at para 86 held that the legal position as to

who decides the question of non-arbitrability under the Act of 1996 can

be divided into four phases, which reads as follows:

"86. The legal position as to who decides the question of

non-arbitrability under the Arbitration Act can be divided

into four phases. The first phase was from the

enforcement of the Arbitration Act till the decision of the

Constitution Bench of seven Judges in Patel Engg.

Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] on

26-10-2005. For nearly ten years, the ratio expressed 17 HCJ A.A.No.165 of 2014

in Konkan Railway Corpn. Ltd. v. Mehul Construction

Co. [Konkan Railway Corpn. Ltd. v. Mehul Construction

Co., (2000) 7 SCC 201] , affirmed by the Constitution

Bench of five Judges in Konkan Railway Corpn.

Ltd. v. Rani Construction (P) Ltd. [Konkan Railway Corpn.

Ltd. v. Rani Construction (P) Ltd., (2002) 2 SCC 388] ,

had prevailed. The second phase commenced with the

decision in Patel Engg. Ltd. [SBP & Co. v. Patel Engg.

Ltd., (2005) 8 SCC 618] till the legislative amendments,

which were made to substantially reduce court

interference and overrule the legal effect of Patel Engg.

Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618]

vide Act 3 of 2016 with retrospective effect from 23-10-

2015. The third phase commenced with effect from 23-

10-2015 and continued till the enactment of Act 33 of

2019 with effect from 9-8-2019, from where commenced

the fourth phase, with a clear intent to promote

institutionalised arbitration rather than ad hoc arbitration.

The amendments introduced by Act 33 of 2019 have been

partially implemented and enforced."

29. Reference was made to the two-Judge Bench decision in Boghara

Polyfab (P) Ltd. (supra) wherein the Hon'ble Supreme Court had

identified and segregated the issues that arise for consideration in an

application under Section 11 the Act of 1996 into three categories and had

reproduced para 22 in that context. It will be appropriate to take note of

para 22.1 of Boghara Polyfab (P) Ltd. (supra), which is as under:

                                     18                                    HCJ
                                                           A.A.No.165 of 2014

"22.1. The issues (first category) which the Chief

Justice/his designate will have to decide are:

(a) Whether the party making the application has

approached the appropriate High Court.

(b) Whether there is an arbitration agreement and

whether the party who has applied under Section 11 of

the Act, is a party to such an agreement."

30. The Hon'ble Supreme Court in Vidya Drolia 2 (supra), in the

Indian context, adopted three categories as identified in Boghara

Polyfab (P) Ltd. (supra). It was observed as follows:

"138 ...

The first category of issues, namely, whether the party

has approached the appropriate High Court, whether

there is an arbitration agreement and whether the party

who has applied for reference is party to such agreement

would be subject to more thorough examination in

comparison to the second and third categories/issues

which are presumptively, save in exceptional cases, for

the arbitrator to decide. In the first category, we would

add and include the question or issue relating to whether

the cause of action relates to action in personam or rem;

whether the subject-matter of the dispute affects third-

party rights, have erga omnes effect, requires centralised

adjudication; whether the subject-matter relates to

inalienable sovereign and public interest functions of the

State; and whether the subject-matter of dispute is 19 HCJ A.A.No.165 of 2014

expressly or by necessary implication non-arbitrable as

per mandatory statute(s). Such questions arise rarely

and, when they arise, are on most occasions questions of

law. On the other hand, issues relating to contract

formation, existence, validity and non-arbitrability would

be connected and intertwined with the issues underlying

the merits of the respective disputes/claims. They would

be factual and disputed and for the Arbitral Tribunal to

decide."

31. While dealing with the omission of sub-section (6-A) by Act 33 of

2019, it was observed that the same was with a specific object and

purpose and is relatable to substitution of sub-sections (12), (13) and (14)

of Section 11 of the Act of 1996 by Act 33 of 2019.

32. In the light of the above background, it was observed that it would

be wrong to accept that post omission of sub-section (6-A) of Section 11,

the ratio in SBP & Co. (supra) would become applicable.

33. Proceeding to examine the question as to whether the word

"existence" in Section 11 refers to contract formation (whether there is an

arbitration agreement) and excludes the question of enforcement

(validity) and therefore the latter falls outside the jurisdiction of the court

at the referral stage, it was held that existence of an arbitration

agreement pre-supposes a valid agreement. It was held that 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 20 HCJ A.A.No.165 of 2014

and abide by the terms. A void and unenforceable understanding is no

agreement to do anything. In that context, it was held that 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. At paragraphs, 139, 140 &

141, it was observed as follows:

"139. We would not like to be too prescriptive, albeit

observe that the court may for legitimate reasons, to

prevent wastage of public and private resources, can

exercise judicial discretion to conduct an intense yet

summary prima facie review while remaining conscious

that it is to assist the arbitration procedure and not usurp

jurisdiction of the Arbitral Tribunal. Undertaking a detailed

full review or a long-drawn review at the referral stage

would obstruct and cause delay undermining the integrity

and efficacy of arbitration as a dispute resolution

mechanism. Conversely, if the court becomes too

reluctant to intervene, it may undermine effectiveness of

both the arbitration and the court. There are certain cases

where the prima facie examination may require a deeper

consideration. The court's challenge is to find the right

amount of and the context when it would examine the

prima facie case or exercise restraint. The legal order

needs a right balance between avoiding arbitration

obstructing tactics at referral stage and protecting parties

from being forced to arbitrate when the matter is clearly

non-arbitrable."

                            21                                          HCJ
                                                        A.A.No.165 of 2014

140. Accordingly, when it appears that prima facie review

would be inconclusive, or on consideration inadequate as

it requires detailed examination, the matter should be left

for final determination by the Arbitral Tribunal selected by

the parties by consent. The underlying rationale being not

to delay or defer and to discourage parties from using

referral proceeding as a ruse to delay and obstruct. In

such cases a full review by the courts at this stage would

encroach on the jurisdiction of the Arbitral Tribunal and

violate the legislative scheme allocating jurisdiction

between the courts and the Arbitral Tribunal.

Centralisation of litigation with the Arbitral Tribunal as the

primary and first adjudicator is beneficent as it helps in

quicker and efficient resolution of disputes."

141. The court would exercise discretion and refer the

disputes to arbitration when it is satisfied that the contest

requires the Arbitral Tribunal should first decide the

disputes and rule on non-arbitrability. Similarly, discretion

should be exercised when the party opposing arbitration

is adopting delaying tactics and impairing the referral

proceedings. Appropriate in this regard, are observations

of the Supreme Court of Canada in Dell Computer

Corpn. v. Union des Consommateurs & Olivier

Dumoulin [Dell Computer Corpn. v. Union des

Consommateurs & Olivier Dumoulin, 2007 SCC OnLine

Can SC 34 : (2007) 2 SCR 801 : 2007 SCC 34] , which

read: (SCC OnLine Can SC paras 85-86) 22 HCJ A.A.No.165 of 2014

"85. If the challenge requires the production and review

of factual evidence, the court should normally refer the

case to arbitration, as arbitrators have, for this purpose,

the same resources and expertise as courts. Where

questions of mixed law and fact are concerned, the court

hearing the referral application must refer the case to

arbitration unless the questions of fact require only

superficial consideration of the documentary evidence in

the record.

86. Before departing from the general rule of referral, the

court must be satisfied that the challenge to the

arbitrator's jurisdiction is not a delaying tactic and that it

will not unduly impair the conduct of the arbitration

proceeding. This means that even when considering one

of the exceptions, the court might decide that to allow the

arbitrator to rule first on his or her competence would be

best for the arbitration process."

34. It was further held that the court at the referral stage would apply

the prima facie test with regard to the expression "existence of an

arbitration agreement" in Section 11 of the Arbitration Act, which includes

aspect of validity of an arbitration agreement on the basis of principles set

out in the judgment. 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.

                                        23                                   HCJ
                                                             A.A.No.165 of 2014

35. The Hon'ble Supreme Court held that limitation law being

procedural and normally disputes being factual, it would be for the

arbitrator to decide guided by the facts found and the law applicable. The

court at the referral stage can interfere only when it is manifest that the

claims are ex-facie time-barred and dead or there is no subsisting dispute.

All other cases should be referred to the Arbitral Tribunal for decision on

merits. It was also held that similar would be the position in case of

disputed "no-claim certificate" or defence on the plea of novation and

"accord and satisfaction"

36. At para 154, discussion under the heading "Who Decides

Arbitrability", is crystallized as follows:

"154. Discussion under the heading "Who Decides

Arbitrability?" can be crystallised as under:

154.1. Ratio of the decision in Patel Engg. Ltd. [SBP &

Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] on the scope of

judicial review by the court while deciding an application

under Sections 8 or 11 of the Arbitration Act, post the

amendments by Act 3 of 2016 (with retrospective effect

from 23-10-2015) and even post the amendments vide Act

33 of 2019 (with effect from 9-8-2019), is no longer

applicable.

154.2. 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.

                             24                                        HCJ
                                                       A.A.No.165 of 2014

154.3. The general rule and principle, in view of the

legislative mandate clear from 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 non-arbitrability 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.

154.4. Rarely as a demurrer the court may interfere at

Section 8 or 11 stage when it is manifestly and ex facie

certain that the arbitration agreement is non-existent,

invalid or the disputes are non-arbitrable, though the

nature and facet of non-arbitrability would, to some extent,

determine the level and nature of judicial scrutiny. The

restricted and limited review is to check and protect parties

from being forced to arbitrate when the matter is

demonstrably "non-arbitrable" and to cut off the

deadwood. The court by default would refer the matter

when contentions relating to non-arbitrability 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 25 HCJ A.A.No.165 of 2014

jurisdiction of the Arbitral Tribunal but to affirm and uphold

integrity and efficacy of arbitration as an alternative

dispute resolution mechanism."

37. In view of the discussions above, notwithstanding that the

petitioner had executed Indemnity Bond, Discharge Bond and consent

letter, as the petitioner had raised various pleas with regard to such

execution, the dispute between the parties is required to be referred to an

arbitrator, as there is a valid arbitration agreement.

38. Resultantly, the Arbitration Application is allowed. Dr. Justice

B. Siva Sankara Rao is appointed as arbitrator to adjudicate the disputes

between the parties. No costs. Pending miscellaneous applications, if any,

shall stand closed.

39. The fee of the arbitrator as well as the other terms and conditions

shall be settled by the parties in consultation with the arbitrator so

appointed. Registry will send a copy of this order to Dr. Justice B. Siva

Sankara Rao in his proper address.

Sd/-

ARUP KUMAR GOSWAMI, CJ

MRR