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This post this authored by Parv Lodha, third year student of LL.B. at the Government Law College, Mumbai. This is the first part of this two-part blog. The second part can be accessed here.
1. INTRODUCTION
On the 22nd of August, 2023, the Bombay High Court (“BHC”), in its judgment of 22Light v. OESPL Pvt. Ltd. (“the Judgment”), refused to admit an application for the appointment of an arbitrator under Section 11(6) of the Arbitration & Conciliation Act, 1996 (“A&C Act”) on the grounds that the dispute sought to be raised by the applicant was “frivolous and meritless.” Proving to be an interesting read, the Judgment establishes an exceptional case wherein the common abstention from judicial intervention, as typically exercised by Courts and statutorily embodied in Section 5 of the A&C Act was held to not be applicable.
2. SUMMARY OF THE JUDGMENT
The facts of the case involved the applicant who was engaged by the respondent for the purpose of arranging finances for the latter and the terms of engagement between the two were expressed in a Memorandum of Understanding (“MoU”) which contained an arbitration clause that stipulated that disputes between the parties to the MoU would be referred to a sole arbitrator. The applicant, in support of its case that it had executed the MoU and taken steps to arrange finances for the respondent relied on an e-mail which referred merely to a Term Sheet (“TS”) that had been prepared by the applicant.
It was the case of the applicant that the TS had been accepted by the respondent and amounts became due and payable to the applicant under the MoU upon the respondent’s acceptance of the TS, in pursuance of which two invoices had also been prepared on the 28th of August, 2021. Interestingly, on the same day an invocation notice had also been sent by the applicant to the respondent, wherein the arbitration clause was relied on and the name of the sole arbitrator was also suggested. However, in the absence of a response from the respondent, the applicant had been compelled to file the Section 11 application.
The BHC observed that there was no dispute that the MoU consisted of an arbitration clause which had been invoked by the applicant in its notice. Strictly speaking, the BHC’s limited role under Section 11 of the A&C Act in regards to satisfying itself as to the existence of a valid arbitration agreement should have ended here, however, the BHC took a step ahead and examined the material on record to make observations on the merits of the case.
The BHC observed that the first invoice pertained to a claim of Rs. 10,00,000/- based on the applicant’s fee for the preparation of an Investment Memorandum (“IM”) and the second invoice was for a fee of Rs. 17,90,00,000/- being 2.5% of the amount of the first disbursement made to the respondent. Therefore, the existence of the two claims were found to be dependent on the happening of specific events. The respondent argued that it never accepted the TS, nor was any IM prepared, nor did the disbursal of financial assistance ever happen. Moreover, the respondent claimed that the applicant’s engagement was terminated in June, 2021 and a fee of Rs. 34,75,500/- was paid to the applicant.
The BHC arrived at the conclusion that there was nothing on record to “even faintly suggest,” that any communication or preparation of an IM had been made by the applicant, therefore, the event which would’ve given rise to the claim under the first invoice never occurred. Moreover, since the claim under the second invoice was based on a percentage of the first disbursal and the applicant hadn’t even suggested that any disbursement was made, it could be held that, even on a prima facie basis, no claim had occurred. The BHC also agreed with the respondent that there was no acceptance of the TS.
The application was therefore refused on the grounds of non-existence of an arbitrable dispute and the claims made by the applicant being “frivolous and meritless.” Paragraph 19 of the Judgment summarises the view of the BHC:
19. The aforesaid material clearly indicates that the present case is one of those few cases, where this Court while exercising jurisdiction under Section 11 of the said Act within the narrow compass available, on a prima facie scrutiny of the material on record, can come to a conclusion that the dispute sought to be raised on behalf of the applicant is frivolous and merit less.
3. ANALYSIS
The Judgment having established the existence and validity of an arbitration agreement, went on to reject the application on the basis of the strength and merits of the claims made by the applicant. According to Section 5 of the A&C Act, a judicial authority is not to intervene in any matter under Part 1 of the A&C Act except where so provided and Section 11(6A) requires a Court to confine itself only to an examination of the existence of the arbitration agreement in an application under Section 11(6). The existence of the arbitration agreement is also admitted by the BHC in the following Paragraph:
“9. There is no dispute about the fact that the aforesaid MoU does consist of an arbitration clause. It is also not in dispute that the applicant did invoke the arbitration clause by issuing notice dated 10.08.2021.”
When viewed from a pro-arbitration lens, the BHC’s examination under the A&C Act should have ended here, for how can an application be rejected for the claims in it being “meritless,” when the Court isn’t required to examine the merits of the claim?
The extent to which the BHC should’ve examined the material on record in arriving at its conclusions can also be determined by comparing the Judgment with established precedents on arbitration law. The three grounds on which the application was rejected were: non-arbitrability, non-existence of dispute and a meritless claim. Therefore, it would be ideal to compare each of these grounds with the precedents that have been established for each of them.
4. MANIFESTLY MERITLESS CLAIMS
The BHC concluded the Judgment by observing that the dispute the applicant sought to raise in arbitration proceedings was “meritless and frivolous.” The question this observation raises is to what extent can a Court intervene in a case where the claim is so manifestly meritless that reference to arbitration would prove to be counter-productive and cumbersome. It is firstly important to note that there is no statutory recognition of such claims nor is there any statutory empowerment to Courts to reject Section 8 or 11 applications on the ground that the contractual claim of the applicant is meritless.
While it is true that the Supreme Court of India in Bharat Sanchar Nigam Ltd. And Another v. Nortel Networks (2021 SCC ONLINE SC 207), observed that at the referral stage, “the court may exercise the prima facie test to screen and knockdown ex facie meritless, frivolous, and dishonest litigation,” and the same is mentioned in the Judgment, it is also important to note that the quoted part was mentioned in the context of limitation and existence of a dispute. The entire Paragraph from Bharat Sanchar Nigam Ltd. (supra) reads:
“While exercising jurisdiction under Section 11 as the judicial forum, the court may exercise the prima facie test to screen and knockdown ex facie meritless, frivolous, and dishonest litigation. Limited jurisdiction of the Courts would ensure expeditious and efficient disposal at the referral stage. At the referral stage, the Court can interfere “only” when it is “manifest” that the claims are ex facie time barred and dead, or there is no subsisting dispute.”
Interestingly, Bharat Sanchar Nigam Ltd. (supra) also acknowledges that the merits of the claim fall within the sphere of questions that are the exclusive jurisdiction of the arbitral tribunal. Paragraph 39 states:
“It will be appropriate to leave that question to be decided by the Arbitral Tribunal on taking evidence, along with the merits of the claims involved in the arbitration.”
While refusing petitions under Section 8 or 11 applications for a meritless claim is not a common practice in India owing to the lack of any statutory recognition of the same, the practice was exercised in the United States of America until it was rebuked by the Supreme Court of the United States in Henry Schein, Inc., et al. v. Archer & White Sales, Inc. (586 U.S. __ (2019)), in which the Court made many interesting and relevant observations in which it did not look at rejections based on grounds of meritless claims favourably for a number of reasons. Firstly, because it was not endorsed in the Federal Arbitration Act of the United States; secondly, the arbitrator is capable of determining its own jurisdiction; thirdly, a Court had “no business” deciding on merits; fourthly, the parties to a contract had to be held to their contractual bargain; and finally, the arbitrator’s imposition of costs for meritless claims is sufficient to discourage frivolous arbitration.
Moreover, it is interesting to note that several institutional rules make a provision for weeding out manifestly meritless claims but the process of such weeding out is done by the arbitral tribunal itself and not by a Court. These include Rule 41(5) of the International Centre for Settlement of Investment Disputes (ICSID) Arbitration Rules (introduced in 2006) , Rule 29(1) of the Singapore International Arbitration Centre (SIAC) Arbitration Rules (introduced in 2016) and Article 43.1 of the Hong Kong International Arbitration Centre (HKIAC) Administered Arbitration Rules (introduced in 2018).
It can be observed in all the rules above that the power to weed out a manifestly meritless claim is vested with the arbitral tribunal and not with a Court.
5. CONCLUSION
It can therefore be observed that the grounds of manifestly meritless claims as adopted by the BHC is not in line with the philosophy of arbitration being a consensual and autonomous process, nor with the principle of minimal judicial interference in arbitration and is most certainly not a practice encouraged in foreign jurisdictions.
In Part 2, the appropriateness of rejecting the application on the grounds of arbitrability and existence of dispute will be discussed.
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