Supreme Court clarifies the scope of pre-referral jurisdiction under Section 11(6A) of the Arbitration Act: Magic Eye Developers vs. Green Edge Infrastructure (2023)

Date of the Judgment: May 12, 2023
Citation: 2023 INSC 528
Judges: M.R. Shah, J. and C.T. Ravikumar, J.
Can a court refer a dispute to arbitration without conclusively deciding on the existence of a valid arbitration agreement? The Supreme Court of India recently addressed this critical question in a case involving Magic Eye Developers Pvt. Ltd. and M/s. Green Edge Infrastructure Pvt. Ltd. The court clarified that under Section 11(6A) of the Arbitration and Conciliation Act, 1996, a court must first determine the existence and validity of an arbitration agreement before referring the parties to arbitration. This judgment emphasizes the importance of ensuring a valid basis for arbitration before compelling parties to engage in the process. The bench comprised Justices M.R. Shah and C.T. Ravikumar, with the judgment authored by Justice M.R. Shah.

Case Background

The dispute arose between Magic Eye Developers Pvt. Ltd. (the appellant) and M/s. Green Edge Infrastructure Pvt. Ltd. (the respondent). The appellant challenged the High Court of Delhi’s decision to refer the dispute to arbitration. The core issue revolved around whether the dispute should be arbitrated based on the existing agreements between the parties. The appellant contended that the primary agreement in question, MOU-2, did not contain an arbitration clause. Conversely, the respondent argued that other agreements, SHA-1, SHA-2, and MOU-1, which contained arbitration clauses, were interconnected with MOU-2 and thus, the dispute should be referred to arbitration. The High Court, relying on the decision of the Supreme Court in Vidya Drolia and Ors. Vs. Durga Trading Corporation, (2021) 2 SCC 1, referred the matter to arbitration, stating that the arbitrability of the dispute and the interpretation of the agreements could be decided by the arbitral tribunal.

Timeline

Course of Proceedings

The High Court of Delhi, in its judgment, referred the disputes to arbitration and appointed a sole arbitrator. The High Court relied on the decision in Vidya Drolia and Ors. Vs. Durga Trading Corporation, (2021) 2 SCC 1, observing that the arbitrability of the dispute and the interpretation of the agreements could be decided by the arbitral tribunal, given the complexity of the transaction. Magic Eye Developers Pvt. Ltd. then appealed to the Supreme Court, challenging the High Court’s decision to refer the matter to arbitration without first determining the existence and validity of an arbitration agreement.

Legal Framework

The Supreme Court examined Section 11(6A) of the Arbitration and Conciliation Act, 1996, which was inserted by the 2015 Amendment Act. This section states:

“(6-A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.”

This provision limits the court’s jurisdiction under Section 11(6) to examining the existence of an arbitration agreement. The court emphasized that this amendment was intended to ensure that the referral court first establishes the existence and validity of an arbitration agreement before compelling parties to arbitrate.

Arguments

Appellant (Magic Eye Developers Pvt. Ltd.) Arguments:

• The appellant argued that Section 11(6A) of the Arbitration Act mandates the court to examine the existence of an arbitration agreement before referring a dispute to arbitration.
• It was submitted that there is a clear distinction between the existence and validity of an arbitration clause and the non-arbitrability of a dispute.
• The appellant contended that the issue of the existence and validity of an arbitration agreement must be decided by the referral court and not left to the arbitral tribunal.
• It was argued that the referral court has a duty to protect parties from being forced to arbitrate when the matter is demonstrably non-arbitrable.
• The appellant relied on the Supreme Court’s decision in N.N. Global Mercantile Private Limited Vs. Indo Unique Flame Ltd. and Ors., 2023 SCC Online SC 495, which held that “Sans an agreement, there cannot be a reference to arbitration” and that an arbitration agreement must satisfy the requirements of Section 7(1) of the Arbitration Act.
• The appellant also cited NTPC Ltd. Vs. SPML Infra Ltd., 2023 SCC Online SC 389, to support the argument that the court must first examine the existence and validity of an arbitration agreement.

Respondent (M/s. Green Edge Infrastructure Pvt. Ltd.) Arguments:

• The respondent argued that all the agreements, SHA-1, SHA-2, and MOU-1, should be read along with MOU-2.
• It was submitted that SHA-1 contains an arbitration clause (27.3), and since the agreements are interconnected, the dispute should be referred to arbitration.
• The respondent relied on the High Court’s observation that the four agreements are interconnected.
• The respondent cited Chloro Controls India Private Limited Vs. Severn Trent Water Purification Inc. and Ors., (2013) 1 SCC 641 and Olympus Superstructures (P) Ltd. Vs. Meena Vijay Khetan, (1999) 5 SCC 651, to support the argument that interconnected agreements should be read together.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

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

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the High Court erred in referring the dispute to arbitration without conclusively determining the existence and validity of an arbitration agreement. The court emphasized that Section 11(6A) of the Arbitration and Conciliation Act, 1996, mandates that the referral court must first examine the existence of an arbitration agreement before referring the parties to arbitration. The court stated that this issue must be decided conclusively by the referral court and should not be left to the arbitral tribunal.

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the need to adhere strictly to the provisions of Section 11(6A) of the Arbitration and Conciliation Act, 1996, which mandates the examination of the existence of an arbitration agreement. The Court emphasized that this is a pre-requisite for referring a matter to arbitration. The Court was also concerned with preventing the wastage of public and private resources by ensuring that parties are not forced to arbitrate in the absence of a valid arbitration agreement. The court was also influenced by the principle that “Sans an agreement, there cannot be a reference to arbitration” as held in N.N. Global Mercantile Private Limited Vs. Indo Unique Flame Ltd. and Ors., 2023 SCC Online SC 495.

Logical Reasoning

The Supreme Court quashed the High Court’s order and remitted the matter back to the High Court to decide the issue of the existence and validity of the arbitration agreement conclusively. The court clarified that it had not expressed any opinion on the merits of the case or whether the four agreements were interconnected, leaving that to the High Court to decide.

The court quoted from the judgment:

“Thus, post-Arbitration and Conciliation Amendment Act, 2015, the jurisdiction of the court under Section 11(6) of the Act is limited to examining whether an arbitration agreement exists between the parties – “nothing more, nothing less”.”

“It is the duty of the referral court to decide the said issue first conclusively to protect the parties from being forced to arbitrate when there does not exist any arbitration agreement and/or when there is no valid arbitration agreement at all.”

“The matter is remitted back to the High Court/referral court to decide the respective arbitration petitions afresh and in light of the observations made hereinabove and to decide the issue conclusively and finally with respect to the existence and validity of the arbitration agreement.”

Key Takeaways

• Pre-Referral Jurisdiction: Under Section 11(6A) of the Arbitration and Conciliation Act, 1996, the referral court must first determine the existence and validity of an arbitration agreement before referring a dispute to arbitration.
• Conclusive Decision: The issue of the existence and validity of an arbitration agreement must be decided conclusively by the referral court and not left to the arbitral tribunal.
• Protection of Parties: Courts must protect parties from being forced to arbitrate when no valid arbitration agreement exists.
• Limited Scope: The court’s jurisdiction at the pre-referral stage is limited to examining the existence of an arbitration agreement.

Directions

The Supreme Court remitted the matter back to the High Court of Delhi to decide the respective arbitration petitions afresh, with specific directions to conclusively determine the existence and validity of the arbitration agreement within three months from the date of the order.

Development of Law

The ratio decidendi of this case is that under Section 11(6A) of the Arbitration and Conciliation Act, 1996, the referral court must conclusively determine the existence and validity of an arbitration agreement before referring a dispute to arbitration. This decision clarifies the scope of the court’s pre-referral jurisdiction and reinforces the principle that a valid arbitration agreement is a prerequisite for arbitration. This judgment is a significant development in arbitration law as it reinforces the principle that the existence of a valid arbitration agreement is a pre-condition for referring a matter to arbitration. It also clarifies the scope of the court’s jurisdiction under Section 11(6A) of the Arbitration Act, ensuring that parties are not forced into arbitration without a valid agreement. This decision reinforces the position of law that the existence and validity of an arbitration agreement must be conclusively determined by the referral court at the pre-referral stage itself.

Conclusion

The Supreme Court’s judgment in Magic Eye Developers Pvt. Ltd. vs. M/s. Green Edge Infrastructure Pvt. Ltd. clarifies the pre-referral jurisdiction of courts under Section 11(6A) of the Arbitration and Conciliation Act, 1996. The court emphasized that the existence and validity of an arbitration agreement must be conclusively determined by the referral court before referring a matter to arbitration. This decision ensures that parties are not compelled to arbitrate without a valid agreement, thereby protecting their rights and preventing the wastage of resources. This judgment sets a clear precedent for future cases, emphasizing the importance of a thorough examination of the arbitration agreement at the pre-referral stage.