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(Avesta Vashishtha is a 3rd year law student, studying at Dr. Ram Manohar Lohiya National Law University, Lucknow)
Keywords- Dispute Resolution, Arbitration, Pre-Conditions
INTRODUCTION
The Constitution of India (constitution) is known to be the supreme authority declaring the essential fundamental rights, which holds the chief pedestal even during the interpretation of ‘specific’ statutes. The same has been held by the Supreme Court (court) in the recent judgement of Lombardi Engineering Ltd v. State of Uttarakhand (Lombardi), when the court held that the topmost hierarchy in an arbitration agreement rests with the constitution, even before the Arbitration and Conciliation Act, 1996 (ACA 1996). The said principle is reasonable in light of the most basic and ultimate rights of the parties, which need to be protected irrespective of the concept of ‘party autonomy’, despite it being the soul of the arbitration procedure. This was also the rationale provided by the court while rejecting the state’s argument that the Court cannot examine the constitutionality of a pre-clause while exercising jurisdiction under Section 11(6) of the ACA 1996.
However, the bench has utterly ignored the intent and scope of Section 11 jurisdiction while disposing off the application in the present case. The court has infringed upon the jurisdiction of the arbitral tribunal, while also violating the most fundamental principles of arbitration. An evaluation of the arbitrariness of the pre-condition under Art. 14 should be based on the facts and circumstances of the matter, and delving into the same shall result in overreach of jurisdiction under Section 11.
In this article, the author would briefly delve into the jurisdiction of the court to determine the constitutionality of such clause, the mandatory nature of a pre-arbitration clause, and provide alternative solutions to the conundrum of violation of principles of the constitution through the inclusion of Section 9 of the ACA in the discussion, instead of instantly rejecting the Section 11 petition.
DIVERSE INTERPRETATION OF SCOPE OF JURISDICTION OF COURT
The matter related to a Section 11 petition, in which the court found certain pre-clauses in the arbitration agreements contained, with the one concerning our perspective stating that a 7% down payment of the claimed amount to initiate arbitration. The court went on to determine the validity of this pre-condition clause, and held it to be unjust and arbitrary in light of Art. 14 of the constitution. The court allowed the Section 11 petition and exhausted the need to comply with the pre-condition.
The scope of jurisdiction under Section 11 has been varying with numerous amendments and subsequent judgements of the courts. The basic understanding followed is that the court’s powers limit itself to the examination of existence of an arbitration agreement, and nothing else, since other aspects of the matter come under inherent jurisdiction of the arbitrator. It has been held in Duro Felguera, S.A. v. Gangavaram Port Limited that while dealing with a Section 11 application, “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”. Additionally, in the case of Brightstar Telecommunications India Ltd. v. Iworld Digital Solutions Private Ltd., it was suggested that the court should assess whether the arbitration clause stipulates the resolution of disputes that have emerged between the agreement’s parties through arbitration.
Even expanding the scope of jurisdiction further, it has been held that the court should apply its mind and see whether the dispute in question correlates to the arbitration agreement between the parties. However, the expansion of jurisdiction had not instilled the power of examining the validity of the arbitration agreement, which still stayed with the arbitrators. But, in the case of Vidya Drolia v Durga Trading, the understanding of ‘existence of arbitration agreement’ has been widened to mean the validity of such agreement. Further, in the 2023 judgement of Magic Eye Developers Pvt. Ltd. vs M/S. Green Edge Infrastructure Pvt., such power was granted to the courts at the stage of appointment of the arbitrator itself. Therefore, with each succeeding judgement, the scope of jurisdiction of courts has widened to such an extent that now, in Lombardi, the bench made it their prerogative to determine the validity of the pre-conditions contained in the arbitration agreement.
NATURE OF PRE-CONDITION CLAUSES
In a number of judgements, it has been laid down that pre-conditions are directory in nature. However, even if the court believes a clause to be mandatory, it has been laid down that the formation of the pre-condition, along with the wordings used, determines the nature of the clause. For example, the use of the word ‘shall’ has been considered as a give away for the mandatory application of the clause. Furthermore, some have held pre-conditions to be ‘condition-precedent’ for initiating arbitration proceedings. The author sides with the interpretation provided in the case of Ravindra Kumar Verma vs M/S. Bptp Ltd. & Anr. (Ravindra Kumar), in which the court allowed the parties to invoke the arbitration agreement, however mandated the fulfillment of the precondition before the initiation of arbitration proceedings.
ANALYSIS AND CONCLUSION
The constitution has been considered as the ‘grundnorm’, with a higher pedestal when considered with any other authority. However, the court has failed to materialise as to what would constitute the violation of this grundnorm. The pre-condition of security deposit by itself cannot be termed invalid, and when clubbed with the facts and circumstances of the matter, its constitutionality can be checked, which is further not permitted under Section 11. The court has also not described how pre-deposit of interest is actually unconstitutional, and merely because it would disincentivise arbitration, it cannot be called violative of the constitution.
The fundamental issue in the judgement of Lombardi is the unconscionable exercise of jurisdiction by the court while allowing the Section 11 application. It was contended by the respondent that the pre-condition of deposit is refundable “by virtue of being only a deposit for security”. This argument added the scope of application of estoppel on the respondent after the arbitration proceedings would have ended in case they refused to refund the deposit amount. The pre-condition should have been fulfilled, and after the conclusion of the arbitration proceedings, estoppel could be imposed on the respondents to refund the security deposit. This could have further protected the principle of party-autonomy and kept the jurisdiction of the arbitral tribunal in place. However, the same was utterly ignored by the court when it went on to determine the consonance of the pre-condition with Art. 14 of the Constitution.
Furthermore, a step in light of the case of Ravindra Kumar could be an application for temporary injunction against the enforcement of an unreasonable pre-condition under Section 9 after the Section 11 application has been allowed. In this scenario, the court would not determine the validity of the pre-condition under Section 11, and the same would be done by the arbitrator after the intuition of the arbitration proceedings. But the unjust nature of the pre-condition would not manifest since an injunction could be granted against the enforcement of the same under Section 9.
Such a procedure, though a little more time-consuming, would prevent the courts from overreaching their jurisdiction under Section 11, and protect the central and critical principles of arbitration. Pre- clause is an issue of admissibility, over which the court does not possess any power to adjudicate under a Section 11 petition, and the same needs to be decided by the tribunal that would have a wider and distinct understanding of the facts and the issues of the matter. Therefore, if the formation of the pre-clause indicates the unconstitutional nature of such a clause, the dispute can still be referred to arbitration, where the tribunal would then determine whether the procedure through which the arbitration proceedings have been initiated is faultless or not.
