This article has been published on the blog of the British Association of Comparative Law at https://british-association-comparative-law.org/2024/10/25/paternalism-in-private-law-the-indian-supreme-courts-evolving-interpretation-of-section-11-of-the-arbitration-conciliation-act-1996-by-abhijnan-jha-and-natasha-singh/

Introduction

Where does judicial creativity end and judicial activism begin? The scholarly debate around the question remains unsettled, even as it assumes an increasing practical significance. In theory, judicial creativity refers to when courts ingeniously interpret the law, finding ways to fill statutory gaps, adapting to unforeseen circumstances, or addressing textual ambiguities. Judicial creativity is thus a part of the natural evolution of the law, particularly in common law jurisdictions, that ensures consistency with the law and legal precedents while still allowing for flexibility. Judicial activism, by contrast, carries with it the negative implication that the courts are ignoring or overriding the law. Prominent constitutional commentator Alexander Bickel coined the phrase “countermajoritarian difficulty” to describe the anxiety about “…unelected judges [rendering] decisions that supplant the majority’s policy preferences as expressed through the electoral process.” This is particularly true when the court assumes a paternalist role, presuming that it knows and is entitled to administer justice in what it considers is the ‘best interest’ of litigants.

Set against this context, this piece examines the evolution of the Indian judiciary’s interpretation of Section 11 of the Arbitration & Conciliation Act, 1996, which provides for court-appointed arbitrators. Contrasting a long period of overreach with more recent efforts to aligning with international norms, it concludes that the judiciary’s approach to arbitration has gradually moved from an interventionist stance to a more restrained one, driven largely by its own shift in perspective.

Background

Often called the most powerful court in the world, the Indian Supreme Court has seldom hesitated to expansively understand its own jurisdiction. In its nine decades of operation, the Court has radically enlarged the textual scope of a number of laws, intervened (frequently) in matters that were considered to be reserved for the executive and the legislature, abolished the requirement of locus standi by allowing anyone to institute litigation in ‘public interest,’ and established the judiciary as a key player in resolving political deadlocks. More generally, through their wide-ranging powers of judicial review, Indian courts have given themselves the last word on any legislation, creating a legal culture characterised by judicial supremacy.

Though the majority of the judiciary’s innovation has been reserved for the domain of public law, private law has not been left untouched. This is particularly true for issues that have a public colour – for example, in Simplex Concrete Piles (India) Limited v. Union of India (2010), the Delhi High Court refused to uphold an exclusion clause in a government construction contract. The clause in question disentitled the contractor from seeking damages for delays caused by the Government, which the Court reasoned would “…defeat the provisions of law, [and] surely not [be] in public interest to ensure smooth operation of commercial relations.” In other words, parties could not contract out of the law of liability to such an extent that it would be “immoral, or opposed to public policy” under Section 23 of the Indian Contract Act, which invalidates contracts with unlawful considerations and objects.

Drawing from Ronald Dworkin’s work, Joel Feinberg theorised that the principle of legal paternalism essentially operates a justification for the State “…to protect individuals from self-inflicted harm, or in its extreme version, to guide them, whether they like it or not, toward their own good.” The attitude of Indian courts, in decisions like Simplex, seems broadly paternalistic. Tasked with being the “bastion of rights and of justice”, it is not surprising that the judiciary considers itself bound to act in what it considers the ‘public interest,’ even in private, contractual matters. It is similarly unsurprising that such an approach is not easily reconciled with the principle of minimal curial intervention in arbitration.

Granted, the now-repealed Indian Arbitration Act, 1940 itself contemplated a high degree of judicial involvement – under the erstwhile statutory framework, the court of first instance was permitted to interfere at every stage of the arbitration proceedings, even after the award was rendered (under Sections 15, 16, and 30 of the 1940 Act, a court could modify, remit, or annul an arbitral award on merits, respectively.) Given the clogged dockets of Indian courts, a party simply had to make an application to the court in order to disrupt or derail the arbitral process. As the Supreme Court remarked in Guru Nanak Foundation v Rattan Singh (1981), “…the proceedings under the Act [had] become highly technical accompanied by unending prolixity, at every stage providing a legal trap to the unwary… [the] informal forum chosen by the parties for expeditious disposal of their disputes [had] by the decisions of the Courts been clothed with ‘legalese’ of unforeseeable complexity.”

Consequently, the arbitration regime was overhauled in 1996 with the introduction of the Arbitration & Conciliation Act. The 1996 Act, adapted from the UNCITRAL Model Law, considerably limited a court’s power to interfere with an arbitration to a set of defined circumstances. Section 5 of the 1996 Act provided that “no judicial authority shall intervene except where so provided in this [Act],” the permitted interventions being, inter alia, the power to refer the parties to arbitration (Section 8), the power to grant interim relief (Section 9), the power to vacate or refuse to enforce an award (Sections 34 and 48, respectively), and the power to step in and appoint an arbitrator as a last resort when the parties, co-arbitrators, or arbitral institution had failed to do so (Section 11).

Article 5 of the Model Law clearly intended to limit the breadth and extent of judicial involvement, and to eliminate the “distinct difficulties”  that arose as a consequence of the non-uniformity of national laws –  particularly because “…courts [enjoyed] a discretion as to whether or not the parties should be referred to arbitration.” In view of this fact, most jurisdictions took a hands-off, even precipitative approach towards arbitration – for instance, in PTE v Tsinlien Metals & Minerals (1992), the High Court of Hong Kong agreed to appoint an arbitrator on the basis of an unsigned arbitration agreement, reasoning that there was clearly an “agreement in writing” operating between the parties.

Interpreting Section 11: the Pre-Amendment Period

Indian courts, however, considered the power to review the parties’ agreement inherent to the power to appoint an arbitrator. Guided by precedent, such as the Supreme Court’s decisions in SBP & Co. v. Patel Engineering Ltd. (2006) and National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd. (2009), they steadily expanded the scope of judicial scrutiny under Section 11, empowering themselves to not only decide whether to appoint an arbitrator, but also on issues such as whether appropriate forum had been selected for the application, if the applicant was party to the impugned arbitration agreement, whether the claim was dead or live, and even whether the parties had already expressly or impliedly settled the dispute in question. The Law Commission, an advisory body to the Ministry of Law & Justice, noted the alarming tendency of courts to over-adjudicate Section 11 applications in its 246^th Report (2014). The Commission consequently recommended legislative intervention to subvert further interference.

The judgements rendered before such legislative intervention were thus symptomatic of the judicial overreach characteristic of this period. For example, the Supreme Court in SMS Tea Estate v Chandmari Tea Company (2011) rather curiously held that an arbitration agreement in an understamped contract did not have a legal existence, and thus could not compel the appropriate court to appoint an arbitrator. Through another two cases, Chloro Controls (2012) and Arasmeta Captive Power Co. (2013), the Court more firmly entrenched its authority to “satisfy” itself that that the “ingredients” for a reference under Section 11 had been met – in other words, that courts were entitled to refuse to make arbitrator appointments and frustrate the arbitral process if they felt it would not be fruitful.

Interpreting Section 11: the Post-Amendment Period

Accepting the recommendation of the Law Commission, the legislature in 2015 inserted Section 11(6-A) into the 1996 Arbitration Act. The provision mandated that courts, “…notwithstanding any judgment, confine [their] examination to the existence of an arbitration agreement.” In other words, courts only had to satisfy themselves that an agreement to arbitrate prima facie existed in the parties’ contract; all other determinations had to be left up to the arbitrator. Promisingly, there was an initial degree of consensus between the judiciary and the legislature. In Duro Felguera, SA v. Gangavaram Port Ltd. (2017), the Supreme Court emphasised that “[t]he legislative policy and purpose… 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.”

Unfortunately, over the next few years, the Supreme Court changed its tune. In the seminal United India Insurance Co. Ltd. case (2018), it undertook a detailed examination of the parties’ agreement: since a particular condition to invoke arbitration had not been fulfilled, the Supreme Court dismissed the arbitration clause as “…ineffective and incapable of being enforced, if not non-existent,” signalling its unwillingness to be interpretatively constrained by Section 11(6-A). The landmark Vidya Drolia case(2020) took the same view of the matter, with a three-judge bench of the Supreme Court collapsing the distinction between the ‘existence’ and ‘validity’ of the arbitration agreement to hold that an agreement could not be acted upon when it failed to satisfy ‘fundamental’ legal requirements – even  something as benign as the non-payment of stamp duty. In the Court’s opinion, such applications had to be rejected at a preliminary stage in order to “cut the deadwood” and “preserve the efficacy of the arbitral process.”

Analysis

The jurisprudence around Section 11 points to one conclusion: Indian courts envisioned for themselves a supervisory role over an arbitration, rather than a facilitative one. Though unfortunate, this sort of parochial reasoning is not peculiar to Indian jurisprudence– it is a common-law view that, as described by Lord Wilberforce, considers arbitration an “annex, appendix or poor relation to court proceedings,” or regards that the conduct of an arbitration, from start to finish, rests on an edifice of domestic laws.

Such a view is increasingly inconsistent with what Emmanuel Gaillard espouses as the ‘delocalised’, ‘denationalised’, or ‘internationalist’ approach. Gaillard, a prominent counsel, arbitrator, and academic, and a leading authority on international arbitration, strongly favoured the idea that an arbitration is rooted in a “transnational legal order,” and is merely supported by a framework of international and national laws. Gaillard’s natural law approach thus identifies and locates the validity of arbitration in its core values, and arbitrators concomitantly “…do not administer justice on behalf of any given State, but…play a judicial role for the benefit of the international community.” Over time, the delocalised approach has come to enjoy has come to enjoy immense currency in international arbitration, especially because it saves arbitration from the idiosyncrasies of domestic law.

However, this was a somewhat radical view for a jurisdiction like India, where arbitration was and still is (relatively) nascent. Given the origins and functioning of the Indian courts, it is understandable why they struggled to understand why an arbitration seated in India, and/or involving Indian parties could escape judicial scrutiny. The conflict between the global push for the harmonisation of arbitral procedure (particularly through the adoption of the UNCITRAL Model Law and the 1958 New York Convention) and a very much ‘territorial’ conception of jurisdiction meant that Indian courts often stretched statutory interpretations to reach their desired conclusion. Consider an example: in Oil & Natural Gas Commission v. Western Company of North America (1987) and National Thermal Power Corp. v. Singer Corp (1993), the Supreme Court ruled that the choice of Indian law as the governing law of the parties’ contract conferred on it the jurisdiction to annul the arbitral awards, though the awards themselves were made in London, not India. Such an interpretation was totally at odds with the purpose of the New York Convention, Article V of which clarifies that an award can only be vacated by a court of the country “…under the law of which…that award was made.” Any other country may only enforce or refuse to enforce it. After the promulgation of the 1996 Act, however, the Supreme Court seemed to realise its error, and in BALCO (2012) clarified that the phrase “under the law of which” referred of the law of the seat of the arbitration, not thelaw of the contract, restrained other courts from adventurously exercising their jurisdiction in this manner.

Conclusion

This case perhaps best exemplifies the Indian judiciary’s characteristic independence, often diverging from or even contradicting legislative directives. The conclusion of the Section 11(6-A) saga is another fitting example: for reasons best known to the legislature, the provision was ultimately deleted via a 2019 Amendment to the 1996 Act. Despite this, the Supreme Court said in NTPC Ltd. v. SPML Infra Ltd. (2023) that Section 11(6-A) would continue to inform judicial reasoning in arbitration petitions. The Indian judiciary has and remains unwilling to not chart its own course; even the recent shift towards more pro-arbitration decisions has been driven not by legislative mandates, but the its own evolving perspective. This shift appears to be influenced by a growing appreciation for international norms (especially as embodied in the UNCITRAL Model Law and foreign caselaw), and reflects a desire to align with global arbitration practices rather than resist them. In PASL Wind Solutions v GE Power Conversion (2021), the Supreme Court allowed two Indian parties to seat their arbitration abroad, overcoming its prior reservations about contracting ‘out’ of or subverting Indian law. In Re: Interplay (2023), it finally clarified that the non-payment of sufficient stamp duty would not restrain the court from acting upon an arbitration agreement. Most recently, in the latest judgement on Section 11(6-A), SBI General Insurance v Krish Spinning (2024), the Court held that a referring court must only examine the existence of an arbitration agreement within the parties’ contract, leaving all other issues, even a purported settlement of the impugned dispute, to be decided by the arbitrator.

Cumulatively, the Court’s jurisprudence, both in respect of Section 11 and otherwise, suggests that legislative interventions have had a limited usefulness in shaping arbitration law in India: instead, meaningful change occurs organically as the judiciary gradually acclimatises to arbitration principles. This mirrors the historical evolution of the law in countries that are now regarded as ‘pro-arbitration’ jurisdictions, and underlines the role of judicial creativity as a legal format in India.