Internal assessment – I

Name: Kriti Gupta

Batch: B.A.LL. B
Section: B
Subject: Arbitration, Conciliation
and Alternate Dispute Resolution
 1. Amazon-Future dispute:
a legal conundrum

Introduction
The dispute between Amazon and the Future Retail Group is a long-standing
and media-highlighted case which has brought into light several nuances of
how the Indian courts deal with emergency arbitration. Moreover, this epic
saga has also brought into the limelight how the Competition Commission of
India contributes to the evolution of anti-trust jurisprudence. This article will
portray to the readers in a simple and analytical manner how this legal battle
had played out and the various nuances of the same.

Facts of the case

It started in 2019 when Amazon got into various shareholder agreements
with Future Retail Ltd., Future Coupons Pvt. Ltd. and their promoters Biyani
Group. Amazon invested INR 1431 crores in Future Coupons Pvt. Ltd. as per
this agreement. What Amazon got in return was that Future Retail Ltd.
cannot transfer any of its retail and other assets without the consent of
Future Coupons Pvt. Ltd. and Future Coupons Pvt. Ltd needed to take
permission from Amazon to give such consent. There was also a list of
prohibited entities in the agreement to which Future Retail Ltd. was
prohibited from disposing, divesting, transferring, selling or otherwise
encumbering any of its retail assets. Reliance Retail was one such prohibited
entity. Inter alia, what these agreements meant were that Amazon could sell
any assets of Future Retail Ltd. on its website too.

Now what happened after these agreements was that Future Retail Ltd.,
Future Coupons Pvt. Ltd. and their promoters Biyani Group entered into an
agreement with the Mukesh Dhirubhai Ambani Group and this resulted in the
amalgamation of the shares of the Future Retail Ltd. with the Mukesh
Dhirubhai Ambani Group. As a direct consequence of this agreement, Future
Retail Ltd. ceased to exist and became one with the Mukesh Dhirubhai
Ambani Group.

Naturally, this subsequent agreement with the Mukesh Dhirubhai Ambani

Group was hurting the business interests of Amazon and thereafter, Amazon
brought this matter before the Singapore International Arbitration Centre,
where an award was passed in favour of Amazon. In response to this, the
Biyani Group called this award a nullity and continued with the transaction
with Mukesh Dhirubhai Ambani Group.

The matter thereafter reached Delhi High Court when Future Retail Ltd.
claimed that the execution of this emergency arbitration award of a foreign
tribunal would result in tortious interference with its civil rights. Based on
this main argument, Future Retail Ltd. filed a civil suit and requested interim
relief from the Delhi High Court by disallowing Amazon from appealing to
statutory authorities based on its arbitral award.

In response to this, Amazon took recourse of Section 17(2) of the Arbitration

and Conciliation Act, 1996 before the Delhi High Court and the main issue
before the High Court was to decide if the foreign emergency award granted
in favour of Amazon was maintainable in India or not. The Delhi High Court
ruled in favour of Amazon and held that such an award would be enforceable
as an order.

Thereafter, Amazon, Future Group, and Reliance brought the fight all the way
to the Supreme Court of India because they were caught in a massive
disagreement that is in the news every day. The lawsuit consists of an
objection to Future Group’s sale of retail assets to Reliance for USD 3.38
billion. The e-commerce behemoth Amazon has based its argument on the
claim that the contested transaction is against the shareholder’s agreement
(SHA) that was signed between Amazon and the Future Group founders.
Future Group, however, has vehemently denied any wrongdoing and has
actually accused Amazon of illegally interfering with the sale without any
justification.

The $1 billion transaction was suspended by the emergency arbitrator chosen

in accordance with the procedures for emergency arbitration included in
the Singapore International Arbitration Centre (SIAC) Regulations, giving
Amazon a temporary advantage. To put it another way, Amazon was issued
an “emergency order” that prevented the two businesses from moving
further with the acquisition until the Arbitral Tribunal was formally
established (EA Order). The question that emerges in the Indian context
concerns the enforcement of this “EA Order,” given that the existing
structure of the Arbitration and Conciliation Act, 1996 (the Act) does not
expressly recognise the legality of the interim orders issued by emergency
arbitrators.

The dispute’s core issue

Amazon is required to purchase 49% of Future Coupons’ share capital under
the terms of the Agreement between the two parties. The aforementioned
agreement also includes a list of “restricted individuals,” which names certain
organisations that Future Group was forbidden from entering into any
agreements with. Notwithstanding these underlying clauses, Future Group
decided to sell some of its assets to Reliance, a division of the Mukesh
Dhirubhai Ambani Group, in order to avoid going bankrupt. It’s also
significant to know that Reliance hopes to purchase Future Group’s liabilities,
which total about Rs 12,801 crores, along with its retail assets. In addition,
Reliance has committed to providing Rs 2800 crores to the combined
company, which would be used, among other things, to settle Future Group’s
outstanding debts. As a result, it is clear that this deal will stop Future Group
from becoming insolvent, and if it fails, Future Group will surely enter
liquidation.

Amazon claims that Future Group violated the terms of the deal by engaging
in a selling transaction with Reliance since Reliance is one of the prohibited
parties listed in the contract. According to Future Group, the Foreign
Exchange Management Act (FEMA)–Foreign Direct Investment (FDI)
Regulations are actually being broken by Amazon. Taking a look at the
overlap of agreements between Amazon and Future Group, it can be argued
that in addition to establishing protective rights, Amazon is also infringing by
controlling Future Retail, which in reality calls for prior government
clearance. Amazon would be in breach of the FEMA-FDI Regulations without
such authorization.

Future Group’s and Reliance’s arguments

Future’s position is that they are not seeking an anti-suit or anti-arbitration
injunction but rather a court order prohibiting Amazon from unlawfully
interfering with the transaction between Future Group and Reliance. Future
Group’s major complaint is with the conclusions in the EA Order and the
interim directives issued in response. Future Group is not seeking a ruling
that the EA Order is unlawful on the merits of the case but rather concerns
the legal standing of the emergency arbitrator and the EA Order under
India’s present arbitration regime.

Amazon’s whole legal defence is based on the EA Order’s legal bindingness,

much like Future Group and Reliance have done. It has been argued that the
SIAC Rules, upon which the EA Order was based, are merely procedural in
nature and cannot grant substantive jurisdiction to a forum to grant interim
reliefs aside from those that are required under Part I of the Act, specifically
Sections 9 and 17, and are therefore ineligible to be used as the basis for the
EA Order. In other words, the argument is predicated on the notion that the
EA Order is illegally null and void, incapable of being enforced in accordance
with Part I of the Act, and as a result, the proceedings before the emergency
arbitrator are null and void because they were conducted in an improper
forum.

Justifications offered by Amazon

In a resounding denial of the claims made by Future Group and Reliance,
Amazon argued that the Delhi High Court lawsuit was unconstitutional and a
misuse of the legal system. Amazon continued by highlighting Future and
Reliance’s actions as they took part in the arbitration procedures before SIAC
and appeared before the emergency arbitrator while making several
arguments that were identical to those made by them in the current lawsuit.
Amazon also argued that the Future Group was improperly attempting to
persuade the Court that the EA Order was invalid and that it did not fall
within the Act’s existing legal definition. Amazon claimed that they had
utilised the party autonomy rights granted to them by Section 2(8) of the
Act, and that as a result, their decision to request emergency relief before
the SIAC was legal under Indian law.
Amazon also used Section 2(1)(d) of the Act, which states that an “arbitral
tribunal” is defined as “a lone arbitrator or a panel of arbitrators,” to support
its claim that the emergency arbitrator contemplated under the SIAC Rules
qualifies as an arbitration tribunal for the purposes of the Act. A legitimate
emergency arbitrator might therefore be included in an arbitration tribunal
according to a combined reading of Sections 2(8) and 2(1)(d) of the Act. Last
but not least, Amazon drew the court’s attention to the SIAC Regulations,
according to which an emergency arbitrator served in such capacity up until
the Arbitral Tribunal was completely formed. In light of the aforementioned
assertion, the emergency arbitrator’s procedures are admissible under Indian
law and the Under Section 17(1) of the Act and Section 17(2) of the Act, the
EA Order is a court order and an interim measure.

Analysis of developments at the Delhi High

Court and the Supreme Court of India
So what happened was that dissatisfied with the emergency arbitrator’s
conclusions, Future moved quickly to explore an alternate strategy to
prevent Amazon from interfering with their deal with Reliance. Future Group
filed a lawsuit with the Delhi High Court, asking for, among other things, an
order from the court prohibiting Amazon from improperly interfering with the
transaction. The maintainability of the lawsuit in view of the ongoing
arbitration procedures before the SIAC came up for decision by the
knowledgeable Single Judge Bench. After recording a lengthy legal argument,
the Court quickly provided its conclusion and found that the claim filed by
Future was in fact maintainable before it in its ruling dated 21-12-2020. To
Future’s dismay, the Court determined that they were not entitled to the
injunctive relief they had requested through the lawsuit. The Court based its
reasoning on the fact that Future had made comparable claims before the
different legislative and regulatory agencies and that these bodies should
keep acting in line with the law.

Although the proceedings before the Securities and Exchange Board of India
(SEBI), Competition Commission of India (CCI), and National Company Law
Tribunal (NCLT) were proceeding quickly, the Delhi High Court’s ruling was
unquestionably a partial victory for Amazon. Amazon quickly pursued
another delaying strategy to obstruct the acquisition out of resentment at
these concurrent developments before the regulatory agencies, and as a
result, it filed an application under Section 17(2) of the Act for the
enforcement of the EA Order. The EA Order was recognised as a legitimate
order under Section 17(1) of the Act and deemed to be enforceable under
Section 17(2) of the Act by a single judge through a judgement dated 2-2-
2021 that expressed support for the EA Order’s legality. The learned Single
Judge ordered that the status quo be preserved with regard to the contested
transaction while deferring making a reasoned ruling until a later time. It is
clear that Amazon won big with this.

Future, who felt wronged by this decision, quite arrogantly appealed it to the
Division Bench. The Division Bench issued its judgement on February 8,
2021, by which the Court ordered a delay in the execution of the learned
Single Judge’s ruling maintaining the status quo. In its reasoning, the
Division Bench said that it does not see why statutory organisations like
NCLT, CCI, and SEBI should be prevented from carrying out their mandates
and acting in line with the law. As the judgement of the learned Single Judge
was appealed before the specific order could be issued, in our opinion, there
appears to be a lack of respect for the Court’s procedure. It is also plausible
to say that the Division Bench erred in recognising that the challenged ruling
did not have finality and may not have been prepared for the Appellate
Court’s review.

As was to be predicted, Amazon, who was extremely unhappy with the

Division Bench’s ruling dated 8-2-2021, utilised its constitutional remedy by
submitting a special leave petition (SLP) to the Supreme Court of India. The
Supreme Court categorically declined to pronounce on the merits of the
contested transaction on 22-2-2021, and as a result, gave the parties two
weeks to submit rejoinders before the case would be considered. Although
the Supreme Court ruled that it should hold off on making a final
determination about the sanction of schemes, it did permit the NCLT to
continue evaluating the merger in the interim.

It is important to highlight at this time that the learned Single Judge of the
Delhi High Court rendered his decision on March 18, 2021. In a significant
ruling rendered by Midha, J., the Court upheld the validity of the emergency
arbitrator appointed under the Act. According to Section 17(1) of the Act, the
Court recognised the EA Order as an order. The decision has fully described
the Indian position on the group of enterprises’ idea and repeated the
emergency arbitrator’s interpretation of Indian law, which appears to be
generally in conformity with the EA Order of 25-10-2020.
Fine by Competition Commission of India
and its effect
Amidst all these, on 17.12.2021, the Competition Commission of India
revoked the original shareholder agreement made between Amazon and
Future Coupons Pvt. Ltd and imposed a never-before hefty fine of INR 200
crores on Amazon for suppressing material information about the scope and
purpose of the agreement. Another reason for the revocation and imposition
of such a lumpsum penalty is that Amazon had described the rights granted
by the shareholder agreement as protective but the CCI had discovered from
uncovered notes of Amazon that it was a strategic decision of Amazon to
control Future Retail Ltd. whose majority shareholder was Future Coupons
Pvt. Ltd. Unfortunately for Amazon, when it appealed against the CCI penalty
to NCLAT, the hefty fine of INR 200 crores was upheld.

Empowered by this, Future Group approached the SIAC to revoke its

arbitration agreement citing the revoking of the original shareholder
agreement between Amazon and Future Coupons Pvt. Ltd.

Meanwhile, the Apex Court felt that the Delhi High Court had not given
sufficient time to Future Retail and Future Coupons Pvt. Ltd and sent the
matter back to Delhi High Court to begin fresh adjudication. Later, based on
a joint memo filed by the Future Group and Amazon, the Apex Court allowed
the arbitration proceedings to continue before the SIAC where the SIAC was
asked to evaluate the Future Group’s claims of revocation of the arbitration
proceedings on the ground that CCI had revoked the original shareholder
agreement.

Conclusion
It doesn’t appear that the Indian courts are especially driven to uphold their
duty to observe lawful arbitral instruments. It goes without saying that this
approach would make India less desirable as a site for international
arbitration. It is also true that over the past ten years, India’s arbitration
sector has suffered due to the controversy over whether Part I of the Act
applies to arbitrations conducted abroad.

In the context of international arbitration, the Indian courts have frequently

demonstrated an unwillingness to uphold international comity. The 1985
UNCITRAL Model Law on International Commercial Arbitration was incorrectly
interpreted by the Indian courts, and they were unwilling to exclude India
from its obligations under the 1958 New York Convention. International
arbitration has unquestionably evolved into an institution that is governed by
universally recognised legal standards and transcends judicial and legislative
peculiarities. The Amazon-Future-Reliance case appears to be one in which
the wealthy plaintiffs have blatantly disregarded the law and the system of
justice. The Supreme Court will have to pass on a number of rulings when
the special leave petition is analysed on the merits in order to advance
institutional arbitration, promote confidence between individuals in the
international business community, and emphasise the significance of the due
process of law.

2. Case analysis: Vidya

Drolia and Ors. vs. Durga
Trading Corp.

Introduction
The December 2020 judgement of the 3-judge bench of the Hon’ble Supreme
Court in Vidya Drolia and Ors. v. Durga Trading Corporation has been a
landmark in settling many controversies that had been looming over the
Arbitration Law jurisprudence ever since the 1996 Act came into force.
Primarily addressing the issue of arbitrability in landlord-tenant disputes
which are governed by the provisions of the Transfer of Property Act,
1882 (“TPA”), the Court delved deeper into the issue of subject-matter
arbitrability and scope and ambit of the jurisdiction of Court while dealing
with an application made under Section 8 or 11 of the Arbitration and
Conciliation Act, 1996. The court also settled down the question of
arbitrability of fraud much in line with its recent judgment in Avitel.

In this article, we shall look deeper into its two primary determinations:
subject matter arbitrability and scope and power of such determination under
Sections 8 and 11 of the Arbitration and Conciliation Act, 1996.

Factual background
The present case was an Appeal challenging the legal ratio expressed by a
Division Bench of the same Court in Himangni Enterprises v. Kamaljeet Singh
Ahluwalia (2017) that landlord-tenant disputes which are governed by the
provisions of the TPA are non-arbitrable based on the ground that such would
be opposed to public policy. In Himangini Enterprises, the Court primarily
relied upon Natraj Studios (P) Ltd. v. Navrang Studios and Booz Allen &
Hamilton Inc. v. SBI Home Finance Ltd.
In brief, Natraj Studios ruled that on broader consideration of public policy,
the licensee-landlord dispute was exclusively triable by Small Causes Court
as per the statute governing it. While Booz Allen ruled that tenancy matters
that are governed by special laws under which the tenant enjoys statutory
protection, only the specified court under that statute has jurisdiction.

The landmark rulings of this judgement can be classified into two:

A. Subject matter arbitrability,

B. Scope and power of determination under Section 8 and Section 11

Subject matter arbitrability

Vidya Drolia recalibrates the law on subject-matter arbitrability and
holistically articulates the fourfold test supplementing the rights test laid
down in Booz Allen2 the ratio of which was however held to be per incuriam
with regard to the arbitrability of the tenancy disputes governed by the TPA.

The interesting thing about the determination of arbitrability is that its test is
an inquiry into the non-arbitrability of the cause of action and subject matter
of the dispute. Thus, arbitrability comes with a negative test which if the
matter in question satisfies, becomes non-arbitrable. These have been
nicely summed up by Pradeep Nayak and Vikas Mahendra as follows:

1. “Cause of action of dispute or its subject matter relates to actions in

rem, which do not pertain to subordinate rights in personam that
arise from rights in rem.
2. It affects third party rights; have erga omnes effect
3. It requires centralized adjudication, and mutual adjudication would
not be appropriate and enforceable
4. It relates to the inalienable sovereign and public interest functions
of the State and hence mutual adjudication would be unenforceable
5. When the subject matter of the dispute is expressly or by necessary
implication non-arbitrable as per mandatory statute(s).”
In order to better acknowledge the contribution of this judgement, we will
understand this judgement alongside the backdrop of judgements relating to
the arbitrability of fraud and tenancy disputes before this case.
Arbitrability of tenancy disputes
The jurisprudence on arbitrability of tenancy disputes can be understood by
the position of the Supreme Court over the years in the three landmark
cases, namely: Natraj Studios, Booz Allen and Himangni Enterprises that
made the law governing arbitrability of tenancy disputes prior to Vidya
Drolia.

In 1981, case of Natraj Studios, the Supreme Court held that for a tenancy
covered under the special statutes regarding rent control, the disputes
between landlords and tenants protected by the statute can be tried
exclusively by the special court provided by the statute and are thus not
arbitrable.

In 2011, the Supreme Court in Booz Allen reiterated the same view on
tenancy matters regulated by special laws where the tenant enjoys statutory
immunity from eviction; the jurisdiction over such disputes is bestowed on
only the specified courts.

In 2017, the Himangni Enterprises case reaffirmed the non-arbitrability of

lease and eviction disputes and held that even in cases governed by the TPA,
and not by a special statute it would be the subject matter jurisdiction of the
civil court and not of an arbitrator to adjudge upon landlord-tenant disputes.

The rationale so far in these cases continued to be the public policy

perspective that statutes dealing with tenancy are special statutes and are
inherently public welfare legislations serving the two-folds purpose of
protecting tenants from unfair evictions and also from unfair
rent/exploitation, striking a balance against an inherently weaker bargaining
power in the hands of the tenant. Therefore, the disputes covered under
these legislations were consistently ruled as non-arbitrable by Indian Courts.
The shift in this viewpoint comes in Vidya Drolia.

In Vidya Drolia and Ors. v. Durga Trading Corporation the Supreme Court
ruled that tenancy disputes governed by the TPA are very much arbitrable. It
observed that landlord-tenant disputes ”are not actions in rem but pertain to
subordinate rights in personam that arise from rights in rem. Such actions
normally would not affect third-party rights or have erga omnes affect or
require centralized adjudication. An award passed deciding landlord-tenant
disputes can be executed and enforced like a decree of the civil court.
Landlord-tenant disputes do not relate to the inalienable and sovereign
functions of the State. The provisions of the Transfer of Property Act do not
expressly or by necessary implication bar arbitration.” Thereby overruling its
decision in Himangni Enterprises the court clarified the law upon this point, it
ruled that landlord-tenant disputes covered and governed by special statutes
would not be arbitrable only “when a specific court or forum has been given
exclusive jurisdiction to apply and decide special rights and obligations.”
Arbitrability of fraud
The history of the jurisprudence governing the arbitrability of fraud under the
regime of the 1996 Act can be understood with the help of the following four
judgements: N. Radhakrishnan, Ayyasamy, Rashid Raza and the most recent
being Avitel, as it stood right before Vidya Drolia in 2020.

Starting from 2009, in N. Radhakrishnan v. Maestro Engineers, the Supreme

Court held that a dispute involving “serious allegations of fraud” would be
non-arbitrable, without defining the ambit and scope of the phrase- ‘serious
allegations of fraud’. Understanding illustratively from the facts of the case,
here the appellant had alleged malpractices in the account books and
manipulation of the finances of the partnership firm by the respondent since
the court ruled that it cannot be referred to arbitration We may thus
conclude that the allegations of financial impropriety were considered as
‘serious’ and determination over such allegations non-arbitrable.

In 2016, Ayyasamy v. Paramasivam the Supreme Court held that mere

allegation of fraud “simpliciter” does not render a dispute no-arbitrable. So to
say, matters having no public interest involved and that is purely between
the parties shall not be regarded as non-arbitrable on grounds of fraud only.
However, if the allegations are such as to make out a criminal case, or when
they are so complicated as to require examination by a civil court in light of
detailed evidence, the court may dispose of the Section 8 application and
examine the case on merits. The Court further illustrated that in serious
cases of fabrication or forgery, or where the fraud is such that permeates the
entire contract, including the Arbitration Agreement, or when such fraud
affects the validity of it, the matter is then non-arbitrable. The primary
ruling, in this case, was the twin test that was further applied in the Rashid
Raza case and has been discussed henceforth.

The decision of the Supreme Court upheld the principle of kompetenz

kompetenz (embodied in Section 16) under which the arbitral tribunal is
empowered to determine its own jurisdiction. What must be noted is that the
Ayyasamy judgement could not theoretically overrule the N.
Radhakrishnan judgement due to their co-ordinate bench strength.

Thereafter in 2019 Rashid Raza v. Sadaf Akhtar, the ruling

from Ayyasamy a two-pronged test was applied by the Court under which the
Court has to first see whether the allegations of fraud permeated the entire
contract, and especially the arbitration agreement, thereby rendering it void
and second, to see that whether the allegations pertained to the internal
affairs of the parties inter se or whether they had an implication on the public
domain.

In 2020 Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. when
HSBC applied for interim measures while Avitel pleaded since there exist
serious allegations of fraud and pending criminal cases therefore, no orders
should be passed. The Court in applying the twin test found that there is no
‘public flavour’ in the allegations of the Respondent. The Court reinstated the
arbitrability of fraud.

The Apex Court in deciding the case for Avitel also observed that the criteria
of arbitrability laid down in Booz Alllen and Afkons should be read in
consonance with the twin test laid down in Ayyasamy in deciding the issue of
arbitrability of fraud. It further held that in a dispute involving allegations of
‘fraud’ whether under Section 17 of the Contract Act, 1872 and/or under the
law of tort or criminal, alone would not lead to non-arbitrability of an
otherwise arbitrable (by applying the twin test) dispute.

Thereafter in December 2020, Vidya Drolia, the Supreme Court reaffirmed

the law laid down in Avitel. It overruled its decision in N. Radhakrishnan and
held that fraud renders a dispute non-arbitrability only:

1. In a clear case where the arbitration clause or agreement itself

cannot be said to exist; or
2. If allegations are made against the State or its instrumentalities of
arbitrary, fraudulent, or mala fide conduct which requires a public
enquiry.
The Court further observed that “it would be grossly irrational and
completely wrong to mistrust and treat arbitration as flawed and inferior
adjudication procedure” thus marking a clear shift in judicial perception and
its increasing faith in the process of arbitration.

Scope and power of determination under

Section 8 and Section 11
The second most notable ruling of this case is with regard to its
determination of the scope and extent of inquiry that can be made under

The issue of arbitrability may be raised at three distinct stages:

1. Under Sections 8 or 11 before the Court (Referral Stage);

2. Before the tribunal (Arbitration Stage); and
3. While challenging the arbitral award before the Court (Challenge
Stage).
The position of law had been clear with regard to the scope of enquiry into
arbitrability at the Arbitration and Challenge stages. Section 16 (1) of the Act
provides for the arbitral tribunal to decide as to its own jurisdiction, including
questions as to the arbitrability of the issue. This is known as the Kompetenz
Kompetenz Rule.

Similarly, for the Challenge stage Section 34 of the Act, a court may set
aside an arbitral award if it finds that:

1. “The arbitration agreement is not valid in law; or

2. The award deals with a dispute which was not within the scope of
the submission to arbitration; or
3. The subject matter of the dispute is, by law, not capable of being
settled by arbitration.”
Upon the point of referral stage determination, the Court has laid down the
following five points:

1. “Sections 8 and 11 of the Act have the same ambit with respect to
judicial interference.
2. Usually, subject matter arbitrability cannot be decided at the stage
of Sections 8 or 11 of the Act, unless it’s a clear case of deadwood.
3. The Court, under Sections 8 and 11, has to refer a matter to
arbitration or to appoint an arbitrator, as the case may be, unless
a party has established a prima facie (summary findings) case of
nonexistence of a valid arbitration agreement, by summarily
portraying a strong case that he is entitled to such a finding.
4. The Court should refer to a matter of the validity of the arbitration
agreement cannot be determined on a prima facie basis, as laid
down above, i.e., ‘when in doubt, do refer’.
5. The scope of the Court to examine the prima facie validity of an
arbitration agreement includes only:

1. Whether the arbitration agreement was in writing? or

2. Whether the arbitration agreement was contained in an exchange of
letters, telecommunication etc?
3. Whether the core contractual ingredients qua the arbitration
agreement were fulfilled?
4. On rare occasions, whether the subject matter of the dispute is
arbitrable?”

The Court laid heavy reliance on the 246 th Law Commission Report and held
that the scope of review under both Sections 8 and 11 is the same, despite
the difference of language in the provisions. The Court reiterated strict
adherence to the words in the erstwhile Section 11(6-A) of the Act and has
also stated that its omission in 2019 does not change the restrictive
examination of the courts at the referral stage. Under Section 8 a judicial
authority is required to refer the parties to arbitration unless it finds that no
valid arbitration agreement exists prima facie while Section 11 gives
restricted power to the court to determine only the existence of an
arbitration agreement. However, such an agreement must be enforceable in
law; an arbitration agreement that is invalid or illegal is not legally
enforceable and can’t be called an agreement at all. This implies that even
under Section 11 the court shall have the power to examine the validity of
the arbitration agreement.

The test at the referral stage is thus a prima fascie test which the Court
simplified and stated, “when in doubt, do refer”.

Criticism
Vidya Drolia has been a landmark with regard to its rulings on subject matter
arbitrability in tenancy disputes and disputes involving allegations of fraud as
well as with respect to its determination of scope and extent of inquiry under
Sections 8 and 11 by the Court and has been welcomed for the most part.

However, experts expressed concern over its ruling with respect to

the DRTs that overlooks the concerns of banks and NBFCs and similarly over
its ruling on non-arbitrability of all intra-company disputes without
considering the subset of intra-company disputes that don’t need the specific
powers available with the NCLT for their resolution.

Another point of concern has been pointed out in the matter of difference in
appealability of the orders passed under Sections 8 and 11. It
is speculated that such a lacuna could be used by recalcitrant parties to
resort to dilatory tactics by filing mala fide Section 11 applications which
would be antithetical to the intention of the legislature and the essence of the
judgement in Vidya Drolia. The Supreme Court in 2021, Pravin Electricals (P)
Ltd. v. Galaxy Infra and Engg. (P) Ltd. has this inconsistency and expressed
its concern in relation to what has been laid down in Vidya Drolia. The Court
invited the attention of the legislature by making an observation stating that
it might be needed to have a look at Sections 11(7) and 37 in order to bring
the orders passed under Sections 8 and 11 at par on appealability.

Conclusion
The Vidya Drolia judgment sets a landmark in the determination of
arbitrability of disputes. By restricting the scope for the allegations of fraud
to roar against the arbitrability of a dispute, the Court prevented a whole lot
of trouble from getting in the way of efficient and smooth arbitration
proceedings. Further, its test for arbitrability along with its observations on
Sections 8 and 11 made it clear that the Indian Judiciary has started
investing faith in the process of Arbitration. A few inconsistencies remain to
be resolved and a few specifications would require elaboration and dedicated
explanation for the Court in the future but the judgment has largely pushed
India’s arbitration-friendly jurisprudence further ahead and has
demonstrated that a similar approach may be expected from Indian courts in
the future.