Bench: N.V. Ramana, Sanjiv Khanna, Krishna Murari
Before indulging deeply in the case study, let's first understand the need for this judgment. As laws change, new judgments of arbitration become very necessary to interpret how those changes impact arbitration and the legal provisions relating to it. It should also be kept in mind that as industries evolve and new practices emerge, there is a need for new judgments of arbitration to address disputes related to these changes. Not every dispute is the same and different disputes need different methods of interpreting the law to reach a fair decision. To interpret it requires a new judgment of arbitration to determine how to apply the law to the specific situation. Even when the law remains the same, new judgments of arbitration come into the picture to clarify existing law and ensure consistent interpretation. and application.
In broad terms, the necessity for new arbitration rulings stems from the requirement to give precise instructions on how to settle conflicts fairly and uniformly while accounting for evolving legal standards, business practices, and particular circumstances. The Vidya Droli ruling was also rendered to offer the legal system a fresh viewpoint, which will eventually aid in the general public receiving just verdicts.
Background of the case
This judgment was passed on 28 February 2019 by a three-judge bench. This judgment provides a remedy and solves all the dubiousness that was conveyed in the case of Himangini Enterprises v. Kamaljeet Singh Ahluwalia. The issue in Himangini Enterprise's case revolved around the tenant's eviction and the validity of the tenancy. At first, it was decided in the Himangini Enterprise case that only civil courts had jurisdiction over problems with the Transfer of Property Act or conflicts between a landlord and a tenant. Several additional rulings addressed the question of tenancy laws' authority after the Himangini Enterprise ruling. The concerns in Vidya Drolia v. Durga Trading Corporation were handled in this particular judgment, and a few other matters were also addressed that will be covered in length.
Issues raised in this Judgment:
- Arbitrability of the DRT Act
- Arbitrability of Tenancy Disputes
- Arbitrability of Fraud
- Interpretation of Sections 8 and 11 of the Act
The judges cited the decision rendered by the Supreme Court of Canada in TELUS Communications Inc. V. Avraham Wellman [2019 SCC 19], holding that arbitration agreements are crucial and that courts have to respect them and promote arbitration. If one looks closely, the court touched on a few areas of arbitration agreements in this ruling.
- The court's decision in this case regarding the arbitrability of tenancy issues was entirely different. This ruling maintained that tenancy, overturning the guidelines established in the Himangini Enterprise case. The Booz Allen & Hamilton Inc. Case, which establishes a distinction between actions in personam and actions in rem, was cited by the court in discussing this matter.
- The court in this case drew a thin line difference between the “existence of an arbitration agreement” and the “Validity of an arbitration agreement”. The court held that the existence of an arbitration agreement is only required to be examined.
- While addressing the issue of Non-Arbitrability the court laid down a test which discussed a few instances where the matter is non-arbitrable: 1) When it is an action in rem and no subordinate action in personam arises out of the dispute, 2) when the dispute has erga omnes effect, 3) When the dispute involves inalienable matters of the state, 4) And, lastly when it expressly or impliedly not arbitrable by the virtue of law.
- The court while addressing the issue of “non-arbitrability” also examined a set of questions which includes: (i) when a request for a reference to arbitration is sought before a civil court (section 8), (ii) when an application for appointment of an arbitrator is made (section 11), (iii) when arbitration has commenced but the statement of defence is yet to be filed (section 16), and (iv) when an arbitral award is sought to be set aside (section 34)
- The concepts of Kompetenz Kompetenz and separability are also examined by the court. They determined that the intent behind sections 8 and 11 was to prevent ‘the courts at the referral stage from deciding on merits unless the legislation permits such questions of non-arbitrability either expressly or by necessary implication.’
- The court also made a reference to the cases of Damodar Valley Corporation v. KK Kar and UOI v. Kishorilal Gupta & Bros in paragraph 82 which laid down - (1) An arbitration clause is an essential component of a contract even though it is an collateral term that differs from the fundamental terms of the agreement; (2) an arbitration clause's operation is contingent upon the contract's existence, regardless matter how extensive its contents may be; it expires along with the contract;(3) The contract may be void ab initio or non est, meaning that it never legally was in place; (4) Even if the contract was duly executed, the parties may terminate it as if it never happened and replace it with a new agreement that only governs their rights and obligations under the terms of the original agreement. (5) In the first scenario, the arbitration clause cannot be implemented if the original contract is void in addition to not being enforceable; in the second scenario, the arbitration clause of the original contract expires when the original contract is replaced, along with it; and (6) There are numerous types of "contract-related disputes" between the two, including those involving repudiation, frustration, breach, and other issues. In some situations, the contract is still in effect for specific purposes about disagreements occurring under or in connection with it, even when the performance of the agreement has ended. The arbitration clause is applicable as long as the contract is in effect for those specific objectives.
- Sections 8 and 11 of the ACA have equal scope regarding judicial interference.
- The court also held that while dealing with purely commercial disputes the court must also take into consideration the principle of “liberal interpretation”
- The court concluded that banks and other financial institutions covered by the DRT Act have unique rights in addition to the recovery processes outlined in the Act when addressing the issues of non-arbitrability and arbitrability of DRT disputes. Thus, it determined that since waiving DRT jurisdiction by implication is prohibited, issues governed by the DRT Act are not arbitrable.
It is noteworthy to mention that several new ideas, such as the "Erga Omnes" principle, were found when reading the verdict. Those who were not familiar with these ideas before may find them useful. This judgment, although it answered many unknown questions, received numerous criticisms. One of the major criticisms that it received is the appealability of orders passed under Section 8 and Section 11. Post this judgment mala fide applications will be filed under section 11. In the matter of M/S NN Global Mercantile V. Indo Unique Flame Ltd., a suit was filed regarding the invocation of section 8 of the Act. In this case, the judgment explicitly mentioned “We doubt the correctness of the view taken in paragraph 92 of the three-judge bench in Vidya Drolia.” But, keeping these criticisms aside it can be said that the Vidya Drolia judgment sets a landmark in the determination of the arbitrability of disputes.