The Intention - Kompetenz-Kompetenz Nexus in Arbitration: (In)novating the Obsolete

Mahathi U and Parameswaran Chidamparam[i]


Arbitration often involves complex procedural issues. Generally, these issues do not require Courts to determine questions of fact. However, in certain situations, Courts must balance the need to uphold party autonomy on the one hand and peculiar facts that necessitate reasonable intervention on the other. In striking the said balance, although Courts must be grounded in the text of the statute, they must not confine themselves to a literal or narrow approach. The Supreme Court in the recent Sanjiv Prakash v. Seema Kukreja case (hereinafter, Sanjiv Prakash) adopted this very approach. The Court was presented with an opportunity to strike such a balance. Unfortunately, in overturning the decision of the Delhi High Court, the Supreme Court did not deliver a case-appropriate rationale, although the final decision is welcome.

Primarily, the issue in appeal surrounded the lack of consensus between the parties on the appointment of arbitrators per Section 11(6A) of the Arbitration and Conciliation Act, 1996 (hereinafter, ‘A & C Act’). As ancillary considerations, the Court also looked into the kompetenz-kompetenz of arbitral tribunals in this regard. The authors identify problems in procedure adopted by the Court, focusing on the aspects of intention and novation in arbitration agreements and contracts, in general. We argue that such procedural flaws must be attributed to legislative lacunae and not just interpretative differences. We suggest context-specific amendments to that end.


Background

The Petitioners had entered into a Memorandum of Understanding (hereinafter, MoU) along with other members of their family. The MoU, inter alia contained a clause giving pre-emptive rights to the members of the family in the event of sale of shares. The subject matter in this MoU was altered in a Shareholders’ Agreement (SHA) entered into with a third-party, i.e., Thomson Reuters, at a later stage. Through the SHA, Thomson Reuters acquired 49% share-holding in the family’s company, while the family retained control over its management. Both the SHA and the MoU contained arbitration clauses. Clause 28 of the SHA, stated that the agreement would supersede all prior agreements between the parties. Despite such an express clause in the SHA the petitioners invoked Section 11(6A) of the A & C Act to approach the Delhi High Court to appoint a sole arbitrator to resolve the dispute between the parties. They argued that the dispute would be governed by the arbitration clause of the MoU, owing to an addition to the parties’ privy to the agreement. On the other hand, the respondents argued that the petitioners could not rely on the arbitration clause in the MoU since it had been novated by the SHA.


The Delhi High Court ruled that the arbitration clause in the MoU could not be invoked since the arbitration clause ceased to exist once the family members and Thomson Reuters entered into the SHA. In the appeal against the Delhi High Court’s decision, it was argued that it would be absurd for the Court to rule that the SHA supersedes the MoU since Clause 12.1(a) of the SHA stated that the divestment of shares would have to be in accordance with the proportions agreed upon by the parties. The Supreme Court held that questions of novation require a detailed analysis of the agreements which goes beyond a prima facie examination regarding the existence of the agreement. The Court emphasized on the need for non-intervention in arbitration proceedings and ruled that such questions must be left to the arbitral tribunal and appointed a sole-arbitrator for this purpose. Consequently, we examine the concept of novation in the context of both holdings and offer a broader overview of objective and intention.


Problems with Procedure - Novation in Arbitration

Section 62 of the Indian Contract Act, 1872, embodies the principle of novation. A contract is novated when the parties alter, rescind or substitute it by agreement. In cases such as the present, where there are consecutive agreements on the same subject, confusion may arise if one of the parties invokes the arbitration clause of a novated agreement and the other questions the existence of the agreement on the basis of novation. The party that initiates the proceedings will have no recourse other than filing a petition under Section 11(6A) of the A & C Act for the appointment of arbitrators. This provision limits the scope of a Section 11 petition to a determination of the existence of an arbitration agreement. The competence of the Court to then appoint arbitrators follows from such a determination. Therefore, in cases like Sanjiv Prakash, the Supreme Court and the High Courts cannot exercise this power without making an incidental ruling on the existence of the agreement. However, the Supreme Court, in the operative part of its judgement, has done precisely that. In doing so, the Court adopted distorted reasoning. The Court cited multiple precedents to state that its powers under Section 11(6A) disallowed it from making such a determination. It then observed that the arbitral tribunal has the said power. This is problematic for two reasons.


The Court did not take into account:

(a.) that the arbitral tribunal does not have the kompetenz-kompetenz to rule on contractual disputes when the arbitration clause invoked by the party is non-existent, consequently preventing the Court from constituting a tribunal;

(b.) the intention of the parties to the agreement when arriving at its conclusion.


In comparison, as regards (a.), the Delhi High Court adopted an approach that was legally sound by examining whether the arbitration clause under the SHA supersedes that of the MoU. Nevertheless, in doing so, the Delhi High Court did not restrict itself to a prima facie review on the existence of the arbitration agreement and arrived at a conclusion that coincidentally contradicts the object and purpose of the A & C Act. On (b.) the Delhi High Court, much like the Supreme Court, did not examine the intention of the parties while rendering its decision. The suggestions in the section that follow may be utilised to tackle issues (a.) and (b.).


Accommodating the Intention of the Parties - The Way Forward

Arbitrations are aimed at saving time and avoiding litigation. Accordingly, the Courts must adopt one of two methods in cases where multiple agreements are involved. First, the Courts may declare that the arbitration agreement was novated, and therefore, arbitration proceedings cannot result from a non-functional arbitration clause. Or, second, the Courts must be permitted to disregard procedural issues under Section 11 by referring to the intention of the parties. The second approach is far more beneficial to parties that prefer arbitration over litigation. Such an approach also favours our already overburdened court system. Irrespective of the number of agreements that are entered into by the parties, if a cumulative consideration of the agreements reflects that the parties intend to arbitrate all disputes arising out of an agreement, the Court must not be precluded from appointing a tribunal by procedural shackles.


For example, when parties engage in multiple commercial transactions, there may be several instances where contracts and agreements are modified and substituted. In such circumstances, if the agreements provide recourse through arbitration, it would be absurd if the Courts are forced to make determinations regarding questions such as novation because one of the parties sought to initiate arbitration proceedings through an agreement that may have been replaced by a subsequent agreement. Emphasizing on the intention of the parties to arbitrate is an approach that has been endorsed by the English Courts, and legislation in India must adopt a similar approach that allows Courts to appoint arbitrators the Courts ascertain that the parties intended to arbitrate all disputes regarding their rights and obligations. Such an approach would also comply with the Supreme Court’s dictum in the Vidya Drolia case.


Conclusion

The Delhi High Court’s rationale is well-founded since the conclusion it arrives at does not suffer from serious logical inconsistencies. However, the Court lost sight of the object and purpose of the A & C Act in its decision since it ruled on novation and rejected the kompetenz-kompetenz argument that was put forward. On the other hand, the Supreme Court was successful in giving fruit to the objectives of the A & C Act, but its reasoning was more focused on the scope of its review under Section 11(6A) to appoint the arbitral tribunal. The murky reasoning raises concerns of the arbitral tribunal and its powers under the A & C Act.

An arbitral tribunal derives powers only by virtue of an arbitration agreement. In cases where the existence of that agreement is in dispute, the parties cannot be expected to agree to arbitrate and therefore, litigation under Section 11(6A) would be the preferred recourse. Such circumstances call for an amendment of the law to address this functional hurdle. The law must reconcile the intention of the parties with the kompetenz-kompetenz of the tribunal, to give effect to the object of the arbitration agreement in line with that of the A & C Act.


[i] Mahathi is a 3rd Year law student at the National University of Advanced Legal Studies, Kochi. Her interests lie in Arbitration, General Corporate Law and International Law. Parameswaran Chidamparam is a 2nd Year law student at the National University of Advanced Legal Studies. His interests lie in Arbitration, Investment Law and International Law.

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