On May 12, 2023, the Supreme Court of India in the case of, Magic Eye Developers Private Limited v. M/s. Green Edge Infrastructure Private Limited, held that the referral court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Act”) is to decide the issue of existence and validity of an arbitration agreement, in disputes where multiple contracts are involved, conclusively to protect the parties from arbitrating. 

Background:

1. The Respondent had preferred an Application under Section 11(6) of the Act before the High Court of Delhi seeking appointment of arbitrator on the ground that disputes have arisen in relation to documents, being, SHA-1, SHA-2, MOU-1 and MOU-2. 

2. SHA-1, SHA-2 and MOU- 1 contained a dispute resolution clause, whilst, MOU-2 did not contain any arbitration clause.

3. The Respondent had stated that SHA-1, SHA-2 and MOU- 1 are interconnected/ interlinked with MOU-2 and as such, all the agreements are to be read with MOU-2. 

4. The High Court of Delhi passed a judgment, wherein, it appointed the Arbitral Tribunal by observing that the arbitrability of the dispute raised, viz-a-viz, clause 27.3 of SHA-1 is an involved issue and such issue can be addressed by the Arbitral Tribunal. The High Court also held that it cannot finally pronounce one way or the other on the aspect that the 4 (four) agreements were inter-connected. 

5. Against the Judgment passed by the High Court of Delhi, the Appeal was preferred by the Appellant before the Supreme Court of India.  

Submissions of Appellant:

1. Whilst deciding an Application under Section 11(6) of the Act, the referral court has to consider and examine the existence of an arbitration agreement and the same should not be left to Arbitral Tribunal, keeping into account the objective of Sub-Section (6A) of Section 11 of the Act.

2. The Court has to give a specific finding on the issue of existence and validity of an arbitration agreement at the stage of pre-referral jurisdiction, as the issue goes to the root of the matter. 

3. It is the duty of the referral court to protect the parties from being forced to arbitrate especially when a matter is non-arbitrable. 

4. If it is held that there is no existence of an arbitration agreement and/or there is no valid arbitration agreement and the issue is left to be decided by the Arbitral Tribunal, the entire exercise by the Tribunal would be futile. 

Submissions of Respondent:

1. SHA-1, SHA-2 and MOU- 1 are interconnected/ interlinked with MOU-2 and as such, all the agreements are to be read with MOU-2.

2. The High Court had held that the four agreements are interconnected and as such, the agreement in which there is an arbitration clause has to be read with MOU-2.

Issue:

What is the jurisdiction of the referral court at a pre-referral stage when the issue with respect to the existence and validity of an arbitration agreement is raised?  

Decision:

The pre-referral jurisdiction of the court under Section 11(6) of the Act is narrow and requires two inquires, viz, a) existence and validity of arbitration agreement, including inquiry as to parties to the agreement and the applicant’s privity to the agreement and b) non-arbitrability of the dispute. The referral court has to conclusively determine in relation to the existence and validity of an arbitration agreement, prior to the appointment of the arbitral tribunal. It is the paramount duty of the referral court to protect the parties from being forced to arbitration. After the Arbitration and Conciliation Amendment Act, 2015, the jurisdiction of the court under Section 11(6) of the Act is limited to examine the arbitration agreement between the parties.  

In view of the above-mentioned observations, the Supreme Court set aside the judgment passed by the High Court of Delhi, as the judgment passed by the High Court of Delhi had not categorically observed on the aspect of existence and validity of the arbitration agreement in relation to the 4 (four) agreements. As a result, the Supreme Court remitted back the matter to High Court for fresh adjudication and moreso, to conclusively decide on the aspect of existence and validity of the arbitration agreements.

Analysis: 

This judgment makes it clear that in case of multiple agreements/ contracts, which are interconnected and wherein, all the agreement do not contain arbitration clauses and dispute arises in 1 (one) agreement or in multiple agreements, the referral court, in such cases, must conclusively determine on the aspect of existence and validity of the arbitration agreement before the appointment of arbitral tribunal. 

It should also be borne in mind, especially in light of this judgment, that in case multiple contracts/ agreements are executed between the same parties for the same transaction, each and every contract, ought to have a dispute resolution clause in order to prevent such disputes at a pre-referral stage, failing which, any dispute under such a contract (without a dispute resolution clause), would entail dismissal of an application under Section 11(6) of the Act, save and except, wherein, parties are able to establish that the contracts/ agreements are inter-connected. 

Please find a copy of the judgment, here.

This update has been contributed by Namitha Mathews (Partner) and Pulkit Malhotra (Senior Associate).

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