-Rohini Roy[1]
The Supreme Court in a recent judgment clarified the referral court’s scope of inquiry in Section 11(6) petitions post the Arif Azim Judgment. The Apex Court’s insistence that courts must refrain from an “intricate evidentiary enquiry” to determine if the Section 11(6) petition is barred by limitation, has sought to settle the extent of intervention that Courts should exercise. On the other hand, we also see cases like Perkins Eastman, where the court is called to intervene to bar unilateral appointment of an arbitrator. These recent trends highlight the importance of adhering to pre-arbitral steps, especially the filing of a valid notice, in forging consensus and the court’s intervention in appointment of an arbitrator.
A petition under Section 11(6) of the Arbitration and Conciliation Act, 2015 is one of the first steps a party may take to commence an arbitration if the other side is uncooperative. Section 11(6) essentially allows the Court on the request of either party to appoint an arbitrator if the other party fails to act as per the stipulated procedure or if the parties are unable to agree on appointment. A section 11 petition is therefore crucial in commencing the arbitration through the appointment of a neutral arbitrator in a timely manner to stem further prejudice to either party’s rights.
The first thing that the Court must examine is whether a valid notice of arbitration was sent by either party. A notice of arbitration is essential for commencing an arbitration as per Section 21 of the Act. Not only does it formally notify the respondents of the existence of a dispute, but also the claimant’s intention to refer the dispute to arbitration either under a pre-existing arbitration agreement or under the Act. Thus, the importance of a notice under Section 21 of the Act cannot be underscored for understanding the disputes referred for arbitration, calculating the relevant time periods for the purposes of limitation in matters relating thereto and the appointment of the arbitrator. A litany of cases has upheld the mandatory nature of the notice under section 21, including the recent judgment passed by Just. Muralidhar in Alupro Building Systems Pvt. Ltd. v. Ozone Overseas Pvt. Ltd.
Any application under Section 11 of the Act may be rejected if the notice does not make appointment as per the agreed procedure between the parties. Just. Muralidhar in his judgment noted that- “The notice under Section 21 serves an important purpose of facilitating a consensus on the appointment of an arbitrator.”
However, a recent trend of unilateral appointments has been observed, which the Courts have consistently struck down as being unfair. The recent case of Perkins Eastman threw light on the importance of a fair procedure of appointment of an arbitrator and avoiding either party misusing its position to drive the nomination of an arbitrator in a veiled manner. The SC in this case rejected the appointment made by the CMD of the respondent as per the agreement due to the biasness and lack of fairness associated with such manner of appointment of the arbitrator.
Mandatory nature of notice for Section 11(6) petition
The invocation of a valid notice is the sine qua non for exercising jurisdiction on any petition under Section 11(6). The petition can be filed only after thirty days have lapsed on issuance of a valid notice of arbitration by the claimant and there has been a failure by the respondent to comply with the same. In Arif Azim, the Court also emphasized on the importance of bringing claims within the limitation period of three years. In this case, since the cause of action arose in 2018, the claimant would have to file their notice by 2022 (one year extension for COVID). Therefore, their failure to invoke the notice within the limitation period made the claims for arbitration ex-facie barred by limitation.
The notice forms the bedrock for determining whether the parties have adhered to the procedure delineated within the arbitration agreement. It is instrumental in notifying the recipient in advance of the claimant’s choice of arbitrator and would ultimately serve to be the cause of action for any section 11(6) petition. As stated in Alupro Building Systems, “Lastly, for the purposes of Section 11 (6) of the Act, without the notice under Section 21 of the Act, a party seeking reference of disputes to arbitration will be unable to demonstrate that there was a failure by one party to adhere to the procedure and accede to the request for the appointment of an arbitrator. The trigger for the Court's jurisdiction under Section 11 of the Act is such failure by one party to respond.”
The notice under Section 21 serves a very definite purpose as stated in Malvika Rajnikant Mehta v. JESS Construction. It puts the recipient on notice as to the nature of the claims, it provides an opportunity to the recipient to contest the admissibility of those claims, it allows the recipient to raise issue with the appointment of an arbitrator. Lastly, the date of receipt of notice has a bearing on the commencement of the arbitration. But high courts across India have arrived at different conclusions on whether a notice is a mandatory pre-requisite to a s11 petition, including the recent case of Kakali Khasnobis.
However, another question arises as to whether the Court or an arbitral tribunal can settle the question of validity of notice. In Oval Investment Pvt. Ltd. v. Indiabulls Financial Services Limited, the Court considered whether the arbitral tribunal has the power to determine whether the procedure as per section 21 has been complied with. Considering the overarching scheme of the act and the underlying principle of komeptenz-kompetenz, the validity of the notice goes to the heart of the jurisdiction of the arbitral tribunal. Jurisdictional matters are completely relegated to the tribunal in determining its own jurisdiction and it is free to do so without interference by civil courts. When the validity of the notice intersects with questions of jurisdiction of the arbitral tribunal, such questions must be left to the discretion of the arbitral tribunal. For instance, if parties are at loggerheads on whether the issues referred in the notice for arbitration are arbitrable as per law or the arbitration agreement, that question must be settled by the arbitral tribunal and not the Court. Courts as an absolute rule cannot interfere into the jurisdiction of the tribunal except in limited circumstances.
Implication of a defective notice on a Section 11(6) petition
In instances where a defective notice has been sent in the first place, the question begets as to whether the other party is even obligated to respond to the notice and appoint an arbitrator. Answering the question in the negative, the Punjab and Haryana High Court in G.J. Singh and Co v Haryana State Agriculture Marketing Board held that there is no obligation incumbent to act on a defective notice and accordingly appoint an arbitrator. In this case, the Court went on to hold that the party had not forfeited its right to appoint an arbitrator since there was no obligation to act on a defective notice. The notice was found to be defective on account of it missing a few important documents which were in support of the claim and hence, it was an incomplete or improper notice. In consecutive judgements by the Bombay High Court in Arohi Infrastructure and Anacon Process Control, a Section 11(6) application was held to be not maintainable for issuance of defective notice.
The other ambiguity that remains in such cases is the status of the section 11(6) petition in front of the Court when a defective notice has been sent. In most cases, the claimant argues forfeiture of right of the respondent to appoint an arbitrator when they fail to cooperate with their notice. In such cases, the Supreme Court in Union of India v Premco-DKSPL(JV) held that the terms for appointment of the arbitrator must be given supremacy by the Court. Due regard must be had to the qualifications prescribed for the arbitrator by the parties in their agreement and to the procedure delineated. Unless there has been express or implied forfeiture, it cannot be held that the other party has repudiated its right to appoint the arbitrator. The repudiation of such right can only be as per the terms of the agreement and not otherwise.
Restrictive ground of rejection of section 11(6) petition on defective notice
Courts in practice have been known to reject a Section 11(6) petition on very limited grounds only. Courts will generally try to encourage the commencement of the arbitration so that neither party is allowed to benefit from its own wrong. Thus, in Kakali Khasnobis case, the Calcutta High Court appointed a sole arbitrator notwithstanding there was no notice invoked. The Court found that the petitioner had taken reasonable steps by invoking the arbitration clause vide a letter and that the notice is not an essential pre-requisite to a Section 11(5) petition.
Additionally, courts have also been seen to appoint a sole arbitrator notwithstanding that the arbitration agreement requires the appointment of three arbitrators. This was done with the sole purpose to speedily commence the arbitration to prevent further prejudice to parties’ rights. For instance, the Bombay High Court in Siddhi Real Estate Developers v Metro Cash and Carry India Pvt Ltd, appointed a sole arbitrator of its choice when the arbitration clauses in the impugned contracts provided for the constitution of separate arbitral tribunals. The Court cited several instances where the Bombay and Delhi High Courts have appointed sole arbitrators where parties disagreed or the other party refused to cooperate with the notice. In such cases, an order to adhere to the agreed procedure could inadvertently delay the process and cause the parties to suffer. The ends of justice could be obviated where the arbitration is not allowed to commence in a timely fashion, purely because of the other party’s refusal to cooperate.
Rigid vs liberal interpretation of notice
A rigid interpretation of arbitral procedures may not always serve justice. While it is an integral document, it cannot be made an overtly technical process. For instance, in the UK, Courts have taken a liberal approach in focusing on the substance and not form of notices. So long as the notice sufficiently identifies the disputes to which it relates and makes clear the sender’s intention to commence arbitration, the notice would be valid. The focus is more on how a reasonable person may have construed the notice given its terms and the context within which it was written. However, failure to adhere to the requirements of the applicable law for service of notice would be tantamount to an invalid service. It is only when the agreed ‘contractual machinery’ has been improperly invoked that a Court may intervene to appoint an arbitrator.
Essentially, a notice should not be interpreted in a rigid fashion, imbued with overtly technical requirements since that would complicate the arbitration process. An arbitration is favoured by parties for its simple and efficient procedures that prioritises fairness and neutrality. Therefore, notices should be construed to do substantive justice without an over-emphasis on its form. Such a broad and flexible interpretation of the notice allows for the effective commencement of arbitration in line with the objectives of the Act, 1996.
Conclusion
The above precedents cited reveal a general trend of Courts trying to uphold consensus and party autonomy in cases where one party to the dispute has made no attempts to adhere to the agreed procedure. Pertinently, attempts at unilateral appointments have been disfavoured by the Court due to the abuse of power exercised by the appointing party. Additionally, parties must be mindful that their notice is filed within three years of the cause of action so the claims are not time-barred. In such cases, the Court is justified in rejecting a section 11(6) petition otherwise it would subvert parties’ autonomy to choose an arbitrator of their choice. The procedures for appointment of arbitrator mentioned in the arbitration agreement are not a mere formality but are mandatory procedures binding not just parties but Courts as well. In cases where the qualification of the arbitrator has been stipulated, Courts have been found to abide by these qualifications even if the Court is appointing the arbitrator.
However, the endeavour to preserve party autonomy is tempered with the need to also preserve justice by not allowing a party to take advantage of its own default. Courts have in such cases taken a flexible approach of holding a notice to be valid so long as it materially conforms to the requirements of a valid notice under Section 21. In very few instances has the Court invalidated a notice in the preliminary stage but in any such instance it has given an opportunity to parties to file a fresh notice by curing the defect. Courts must balance the interests of party autonomy and timely commencement of arbitration while exercising its jurisdiction in a section 11(6) petition.
[1] Rohini Roy is a student at National Law University Odisha.
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