Supreme Court clarifies the scope of “prima facie” review of arbitration agreements: Pravin Electricals vs. Galaxy Infra (2021)

Case Background

Pravin Electricals Pvt. Ltd. (the Appellant), a company providing electrical services, was awarded a contract by South Bihar Power Distribution Company Ltd. (SBPDCL) on September 22, 2014. Galaxy Infra and Engineering Pvt. Ltd. (the Respondent), a consultancy services company, claimed that it had facilitated the Appellant in securing the contract and was entitled to a commission under a Consultancy Agreement dated July 7, 2014.

The Respondent alleged that after initial discussions, a draft agreement was sent to the Appellant on July 15, 2014. The Appellant responded the same day, stating that certain terms were not acceptable. The Respondent contended that all differences were later resolved through email correspondence, culminating in a final Consultancy Agreement. The Respondent sent an invoice on September 27, 2014 for Rs. 28.09 lakhs as an advance, addressed to M/s Process Construction and Technical Services Pvt. Ltd. (“Process”), referencing an agreement between the Respondent and Process. Another invoice was sent on April 24, 2016, also addressed to Process. On June 30, 2017, the Respondent sent a final invoice to the Appellant for Rs. 5.54 crores, claiming it was due under the alleged Consultancy Agreement of July 7, 2014.

The Appellant denied the existence of any such agreement on March 22, 2018. The Respondent invoked the arbitration clause on April 26, 2018, nominating a Sole Arbitrator. The Appellant denied the existence of the agreement on May 3, 2018. The Respondent finally provided a copy of the alleged agreement on May 14, 2018.

Timeline:

Course of Proceedings

The Respondent filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the Delhi High Court, seeking the appointment of a Sole Arbitrator based on the alleged Consultancy Agreement dated July 7, 2014. The Delhi High Court directed the Respondent to produce the original agreement and the Appellant to produce Mr. M.G. Stephen, Managing Director of the Appellant, for signature verification. The High Court also obtained specimen signatures of Mr. M.G. Stephen and sent the original agreement and signatures to the Central Forensic Science Laboratory (CFSL) for a report.

The CFSL report was inconclusive. The Delhi High Court, after reviewing the documents and correspondence between the parties, held that a Consultancy Agreement was executed on July 7, 2014, and that the parties had agreed to an arbitration clause. The High Court noted that the Appellant had made payments in accordance with the terms of the agreement. The High Court also stated that the fact that the invoices were raised on Process was not relevant, as Process was merely a sub-contractor of the Respondent. The High Court appointed Justice G.S. Sistani, a former Judge of the Delhi High Court, as the Sole Arbitrator.

Legal Framework

The case primarily revolves around the interpretation of Sections 8 and 11 of the Arbitration and Conciliation Act, 1996.

• Section 8 of the Arbitration and Conciliation Act, 1996: This section deals with the power of a judicial authority to refer parties to arbitration when there is an arbitration agreement. It states that if a party to an arbitration agreement brings an action before a judicial authority, the authority must refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.
  
  “A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”
• Section 11 of the Arbitration and Conciliation Act, 1996: This section pertains to the appointment of arbitrators. Sub-section (6) specifies the circumstances under which a party may request the Supreme Court or the High Court to take necessary measures for the appointment of an arbitrator. Sub-section (6A) states that when considering an application under sub-sections (4), (5), or (6), the Court shall confine itself to examining the existence of an arbitration agreement.
  
  “(6) Where, under an appointment procedure agreed upon by the parties, — (a) a party fails to act as required under that procedure; or (b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or (c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.”
  
  “(6A) 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.”

The Supreme Court also referred to the 246th Law Commission Report, which recommended amendments to Sections 8 and 11 to clarify the scope of judicial intervention at the pre-arbitral stage. The report suggested that courts should only examine the existence of an arbitration agreement and leave other issues to the Arbitral Tribunal.

Arguments

Appellant’s Arguments (Pravin Electricals):

• The alleged Consultancy Agreement dated July 7, 2014, is a concocted document. The CFSL report did not confirm the authenticity of the signatures on the agreement.
• The fact that negotiations and a draft agreement were exchanged after the alleged final agreement of July 7, 2014, shows that no such agreement existed.
• The agreement was notarized in Faridabad, Haryana, even though the parties are based in Mumbai and Bihar, and the Notary’s license had expired before the alleged notarization.
• The invoices and payments were made by Process, not the Appellant, indicating that the agreement was between the Respondent and Process.
• The Respondent’s inconsistent descriptions of Process (as a joint venture partner, a company with common directors, and finally as a sub-contractor) demonstrate the lack of a genuine case.
• The High Court’s findings regarding invoices and payments are incorrect and against the record.

Respondent’s Arguments (Galaxy Infra):

• Even if the Consultancy Agreement of July 7, 2014, is not considered, an arbitration clause exists in the draft agreement exchanged between the parties, which culminated in a final agreement on July 25, 2014.
• The correspondence between SBPDCL and the Respondent, with copies marked to the Appellant, shows that the Respondent acted as a go-between and successfully obtained the bid for the Appellant.
• The CFSL report was inconclusive, and the correspondence between the parties shows that they interacted with each other, and the Appellant would not have secured the bid without the Respondent’s efforts.
• The High Court’s judgment does not require interference, as the documents on record clearly indicate an agreement between the parties.

Innovativeness of the argument: The Appellant argued that the very fact that negotiations took place after the alleged agreement of 7th July, 2014, shows that no such agreement existed.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:

1. Whether the High Court was correct in conclusively determining the existence of an arbitration agreement based on a preliminary review, or whether a deeper consideration of the issue should have been left to the Arbitral Tribunal.

Treatment of the Issue by the Court

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

Authorities

The Supreme Court relied on the following authorities:

Judgment

The Supreme Court allowed the appeal and set aside the Delhi High Court’s judgment, which had conclusively found that an arbitration agreement existed between the parties. The Supreme Court held that the High Court should not have conclusively decided the existence of an arbitration agreement but should have left it to the arbitrator to decide as a preliminary issue.

The Court upheld the appointment of Justice G.S. Sistani as the Sole Arbitrator but directed that the arbitrator first determine whether an arbitration agreement exists between the parties. The Court clarified that all issues will be decided without being influenced by the observations made by the Court, which were only prima facie in nature.

How each authority was viewed by the Court?

• Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714* was used to explain the history of amendments to Sections 8 and 11 of the Arbitration and Conciliation Act, 1996, and the shift towards limiting judicial intervention at the referral stage.
• Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209* was used to discuss the distinction between the existence and validity of an arbitration agreement in the context of stamp duty.
• Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1* was used to clarify the scope of judicial review under Sections 8 and 11, stating that the court should apply a “prima facie” test to determine the existence of an arbitration agreement, which includes aspects of validity.
• Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd., (2005) 7 SCC 234* was referred to for the principle that the court should look at the issues/controversy only prima facie.
• National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267* was used to discuss the categories of issues that can be considered by the court at the stage of an application under Section 11 of the Arbitration Act.
• Caravel Shipping Services Pvt. Ltd. vs. M/s. Premier Sea Foods (2019) 11 SCC 461* was cited to show that an arbitration agreement need not be signed by the parties.
• Jugal Kishore Rameshwardas v. Goolbai Hormusji, AIR 1955 SC 812* was cited to show that an arbitration agreement needs to be in writing, though it need not be signed.
• Konkan Railway Corpn. Ltd. v. Mehul Construction Co., (2000) 7 SCC 201* was used to discuss the nature of powers of the Chief Justice under Section 11(6) of the 1996 Act.
• Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd., (2002) 2 SCC 388* was used to discuss the nature of powers of the Chief Justice under Section 11(6) of the 1996 Act.
• SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618* was used to overrule the view that the power to appoint an arbitrator under Section 11 is administrative and held that it is judicial.
• Vimal Kishor Shah v. Jayesh Dinesh Shah, (2016) 8 SCC 8* was referred to for the test applied at the pre-arbitration stage of whether there is a “good arguable case” for the existence of an arbitration agreement.
• Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729* was referred to regarding the need for the resolution to exist in the arbitration agreement.
• M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696* was referred to in Duro Felguera to observe that the memorandum of understanding in the said case did not incorporate an arbitration clause.
• Oriental Insurance Co. Ltd. v. Narbheram Power & Steel (P) Ltd., (2018) 6 SCC 534* was referred to for rejecting the application for reference in the insurance contracts holding that the claim was beyond and not covered by the arbitration agreement.
• United India Insurance Co. Ltd. v. Hyundai Engg. & Construction Co. Ltd., (2018) 17 SCC 607* was referred to for rejecting the application for reference in the insurance contracts holding that the claim was beyond and not covered by the arbitration agreement.
• Vulcan Insurance Co. Ltd. v. Maharaj Singh, (1976) 1 SCC 943* was referred to for the scope of the arbitration clause.
• PSA Mumbai Investments Pte. Ltd. v. Jawaharlal Nehru Port Trust, (2018) 10 SCC 525* was referred to for coming to the conclusion that the arbitration clause would not be applicable and govern the disputes.

What weighed in the mind of the Court?

The Supreme Court was primarily influenced by the following factors:

• The inconclusive nature of the CFSL report regarding the signatures on the alleged agreement.
• The fact that negotiations and a draft agreement were exchanged after the alleged final agreement of July 7, 2014.
• The notarization of the agreement in Haryana, which had no connection to the parties or the subject matter of the agreement.
• The expired license of the Notary who notarized the agreement.
• The fact that the invoices and payments were made by Process, not the Appellant, and the inconsistent descriptions of Process by the Respondent.

These factors led the Court to conclude that there were serious doubts about the existence of a valid arbitration agreement, and therefore, the matter should be left to the arbitrator to decide as a preliminary issue.

The Court’s reasoning was a combination of logical analysis and a sentiment that the High Court had overstepped its bounds by conducting a mini-trial.

Key Takeaways

• The Supreme Court clarified that the scope of judicial review under Sections 8 and 11 of the Arbitration and Conciliation Act, 1996, is limited to a “prima facie” determination of the existence of an arbitration agreement.
• The Court emphasized that a detailed examination of the validity of the agreement should be left to the Arbitral Tribunal.
• The Court reiterated that the “prima facie” review does not involve a mini-trial, and the courts should not delve into the merits of the case at the referral stage.
• The Court underscored the importance of the 246th Law Commission Report, which recommended amendments to limit judicial intervention at the pre-arbitral stage.
• The judgment reinforces the pro-arbitration stance of the Indian judiciary, as the Court was of the view that the arbitrator should determine the existence of an arbitration agreement.

Flowchart of Judicial Review of Arbitration Agreements

Conclusion

The Supreme Court’s judgment in Pravin Electricals Pvt. Ltd. vs. Galaxy Infra and Engineering Pvt. Ltd. is a significant contribution to the jurisprudence of arbitration law in India. The Court has clarified the extent of judicial intervention required at the stage of referring parties to arbitration, emphasizing that a detailed examination of the agreement’s validity should generally be left to the arbitrator. The judgment underscores the importance of the “prima facie” review standard and reinforces the pro-arbitration stance of the Indian judiciary. By limiting the scope of judicial intervention, the Court has ensured that arbitration proceedings are not unduly delayed by protracted court battles over the existence of an arbitration agreement.